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New limits for pension plans, IRAs and 401(k) plans for 2013. New wage base and maximum benefit for Social Security

29 Oct

IRS Announces 2013 Official Indexed Figures for Retirement Plans and Other Employee Benefit Plans

The Internal Revenue Service (IRS) issued Information Release 2012-77 on October 18, 2012, providing the 2013 official indexed figures for retirement plans and other employee benefit plans.

Annual dollar limit for pretax contributions to Section 401(k), 403(b), and 457 plans: $17,500 (The 2012 limit was $17,000)

Annual dollar limit on catch-up contributions for age 50 and over remains unchanged: $5,500. An individual age 50 or over may contribute a total of $23,000 annually.

Section 414(q) pay threshold for highly compensated employees remains unchanged from 2012: $115,000

Section 415 limit for defined benefit plans: $205,000 (The 2012 limit was $200,000)

Section 415 limit for defined contribution plans: $51,000 (The 2012 limit was $50,000) maximum employee and employer contribution)

Section 401(a)(17) recognizable pay limit: $255,000 (The 2012 limit was $250,000). Pay above this amount cannot be considered in a qualified pension or 401(k) plan

Social Security

Wage Base: The 2013 Social Security wage base is $113,700. (The 2012 amount was $110,100.) The maximum tax payable is $7,049.40.

FICA/Medicare Tax Rate: The FICA tax rate remains at 7.65%: 6.2% for Social Security and 1.45% for Medicare combined.*

*The Temporary Payroll Tax Cut Continuation Act of 2011 reduced the Social Security payroll tax rate by 2% on the portion of the tax paid by the worker through the end of February 2012. The Middle Class Tax Relief and Job Creation Act of 2012 extended the reduction through the end of 2012. Under current law, this temporary reduction expires at the end of December 2012.

Beginning in 2013, the Patient and Protection Affordable Care Act (Obamacare) increases the Medicare tax rate on wages by 0.9% (from 1.45% to 2.35%) for higher-income individuals. The payroll tax increase applies to wages over $200,000 for single tax filers and $250,000 for couples filing jointly. ($125,000 for a married individual filing separately.) The 1.45% Medicare tax applies to all earnings.

Maximum Monthly Benefit: For someone retiring at full retirement age in 2013, the maximum benefit is $2,533. (The 2012 amount was $2,513.) This equals $30,396 per year or $45,594 for a married couple.

Annual Earnings Test Limit: For individuals under full retirement age, the annual earnings test limit is $15,120. (The 2012 amount was $14,640.) For individuals attaining full retirement age in 2013, the annual earnings test limit for the months prior to attaining full retirement age is $40,080. (The 2012 amount was $38,880.) There is no annual earnings test for individuals who have attained full retirement age.

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Cash Balance pension plans, private health insurance exchanges, defined contribution benefits – how consulting firms and employers changed America

5 Oct

Employee benefit communication

If you were in the consulting business how would you make money? You would churn out new ideas, convince employers to adopt them and rake in big bucks helping employers implement, manage, and communicate your ideas. Then you would start all over with a new idea and a new direction. Employee benefit consulting firms have no concern for the impact these ideas have on individual employees, they work for the employer whose only goal, despite all the platitudes and buzz words, is to manage costs and save money. Consulting firms and employers are great at positioning these benefit plan changes in ways that sound high-minded with the primary goal of benefiting the worker.

Let me see if I can say this delicately … Bullshit!

The fact is that the changes designed and recommended by consulting firms and adopted by employers over the last several decades have profoundly changed America, changed the concept of retirement and in the future will change health care as well… and not for the better.

Thirty years ago over sixty percent of American workers participated in a defined benefit pension plan with the promise of an annuity for life upon retirement. This along with Social Security and personal savings provided many Americans with a secure retirement. In the old days we used to call it the three-legged stool of retirement income. Today one leg is gone, one is teetering and the third has been gnawed away by the stock markets. By 2009, the last year for which data are available, only 16 percent of private-sector workers were active participants in defined-benefit plans, compared with 74 percent of public-sector workers. What happened? There are several contributing factors to this change, but the bottom line is that traditional pension plans became expensive to operate and a drag on corporate finances. In 1985 a consulting firm came along with a “better idea,” the cash balance pension plan.

Cash balance plans while technically a defined benefit pension provide much lower benefits, cost less to fund and create the environment where participants take a lump sum payment rather than annuity for life; a very bad idea. The song and dance selling these plans was that they would be more appreciated by workers, they could see their benefits grow, they could more readily take their benefits with them. What they forgot to tell workers was that this was the beginning of the end of retirement as we knew it.

I’m doing this for your own good

Next came the 401(k) plan, again pushed by consulting firms first as a supplement to the traditional pension, but as we all know eventually the only employer based form of retirement security. Many employers, including some of America’s largest, transitioned from a traditional pension to cash balance to 401(k) each time telling employees how it was really for their benefit, not just to save money. How’s that working out for you? As of May 2012 the average balance in all 401(k) accounts is just over $60,000, according to the Employee Benefit Research Institute. Even people within 10 years of retirement have saved an average of only $78,000, and more than a third of them have less than $25,000. Seventy-eight thousand dollars is sufficient to provide a single life annuity of about $432 per month. More than half of U.S. workers have no retirement plan at all.

America is going to pay a heavy price for the elimination of annuity pensions and creation of greater reliance on Social Security to fill that gap.

Now health benefits are on the block

The latest idea and one that sounds the death knell for employer health benefits is the private health insurance exchange. Here the story line is not saving money, but giving workers more choice. In reality what is happening is a voucher system whereby the employer gives the worker a pool of money and the worker selects a health plan from among “competing” insurers arranged for and organized by the consulting firm. Also what is happening is the employer detaching itself from running a health benefits program. Over time the employer contribution will increase only by the minimum amount possible, but of course the worker will be free to “choose the plan that best meets his needs.” Does this concept sound familiar?

These private exchanges are insured which means that large employers are giving up their self-insured plans where the bulk of costs are for claims incurred by employees and their families and where the employer negotiates administrative fees. The absurdity of this one is that the insurance companies will compete for the employees and thereby lower costs. What have insurance companies been doing for decades if not competing for customers?

Consultants and any employee benefits professional with half a brain (of which there apparently are many) know that competing insurers have little to do with controlling health care costs not to mention employers are adding costs by going from self-insured to insured status. The way Plan A will be cheaper than Plan B is if it provides less coverage, has higher out-of-pocket costs and/or restricts the network of providers. That’s the choice workers have when they spend the employer contribution, a choice between premiums and out-of-pocket costs.

Initiated by the Affordable Care Act employers have also been cajoled into moving retirees from the group plan into Medicare Part D for prescription coverage.

The next logical move will be to simply eliminate the employer private exchange, pay any penalty and move workers into the new state or federally run Exchanges to take advantage of government subsidies for the vast majority of Americans.

For health benefits as well as pensions we are moving from a defined benefit approach to a defined contribution that the employer can control. It is about workers picking up all of the cost beyond what the employer decides it wants to pay. Some people will argue that’s the way it should be, that’s fine except for the fact it flies in the face of reality.

The disappearance of pensions and now employer sponsored health benefits is not good for America. We all know Social Security and Medicare are not in great shape, we know that the Affordable Care Act will add billions and billions of liability on the federal government in the form of Exchange subsidies. And now we know what employers have been doing and continue to do will increase pressure on all these programs.

It is well documented that the average worker has no clue about what it takes financially to retire, or what health care will cost when they do retire. 401(k) account balances even for workers nearing retirement age (or what used to be retirement age) are pitiful in terms of creating an income for thirty years in retirement. Beyond that even individuals with considerable assets face the difficulty of investing and using those resources so as not to outlive them.

For a different perspective on retirement satisfaction look at this report from Towers Watson.

We are a conflicted society. Some of us want small government, others want more safety nets provided, some want to push responsibility on the individual and others see society having a greater role. No matter your position, workers cannot and do not have the discipline to both save for retirement and pay ever increasing in health care costs. Employers who think they do are making a big mistake.

We are running out of time to get this right.

Retirees don’t have the long term to deal with low interest rates

15 Sep

The Federal Reserve Chairman has vowed to keep interest rates at near zero for as long as it takes to help the economy. That may be quite awhile.

In the meantime savers and retirees who used to count on interest payments to supplement income have nowhere to go. The reality is that even with low inflation they are getting a less than zero return on cash investments.

While core inflation is low, some things retirees must spend money on like food and gasoline are increasing in cost. Couple all this with a very low likely COLA for Social Security in 2013 driven by a low growth in the CPI-W and many retirees are facing a double whammy. And guess what, these folks are a big part of the economy too, some of the very people the Fed is counting on to jump start the economy by spending.

Even retirees fortunate to have a 401(k) are hurting. Once in retirement the asset allocation shifts to be more conservative with less in equity to lower risk and more in investments such as stable value funds or GICs which are interest driven. These investments naturally see a decline in their returns as well. For those who can put their assets at a bit more risk, solid dividend paying companies may be an alternative, but that applies to a small segment of retirees.

So Mr Bernanke, while you see a long term benefit in low interest rates now, many retirees counting on interest income don’t exactly have the luxury of a long term perspective and those folks represent one-sixth of our population.

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A must read article about how politicians manage pension funds and put taxpayers at risk

13 Jul

You promised me…

The problems of many state pension funds are well documented here and elsewhere. However, how funds got into trouble is less well-known. We worry about accountability in the financial crisis while at the same time not a peep is heard about the gross mismanagement at the state level putting their citizens at far more direct financial risk in terms of taxes and lost services.

Here is a must read from Bloomberg.com

Do you know what liabilities lurk hidden in your state pension plans?

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Worst States for Retirees

12 Jul

R >20 R 10–20 R 3–10 R <3 to D <3 D 3–10 D 10–...

I was perusing MSN Money recently and came across an article about the ten worst states for retirees. I followed their link to this article.

I found that the ten worst states are:

  1. Connecticut
  2. Illinois
  3. Rhode Island
  4. Vermont
  5. Massachusetts
  6. New Jersey
  7. Minnesota
  8. New York
  9. Maine
  10. Wisconsin

The states made the list mostly because they have in common high income and property taxes (Maine had the added distinction of bad weather in the winter). These states also have in common something else. They are all Blue and generally quite liberal or shall we say progressive states. In other words they don’t mind spending money on their own versions of entitlements and other goodies designed to improve society. That’s all well and good, but as I have said more often than you want to hear, beware of the unintended consequences.

These states have created environments that strive to improve things for citizens by spending lots of money and in the process make it difficult, if not impossible, for their own citizens to live in the state once they retire. How ironic. What else is ironic is that in several of these states the high taxes exist in part because of the generous pension and retiree benefits for local and state government workers which may be the only group of retirees who can afford to stay put once they retire.

Progressivism is not always progress … or affrodable.

 

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The pension plan is unsustainable! Who says?

11 Jul

American Express started its pension plan in 1875. The company where I worked for forty-eight years has a pension plan that began in 1911 and yet today we hear that traditional defined pensions are unsustainable, they are too expensive and create large liabilities.

What has changed since the days of doing the right thing for workers? These older plans started long before government involvement for one thing. Prompted in part by the failure of the Studebaker company (there’s that auto industry again) Congress passed ERISA in 1974. It was supposed to protect workers from pension failures and funding shenanigans. To some extent it accomplished that, but also made the operation of a pension plan so complex and costly the idea of starting a new plan quickly faded and the gradual demise of these plans was assured. The public sector became the last bastion of a traditional pension but is now plagued by politicians failing to fund unaffordable promises.

Another key factor in the shift from a traditional pension to the 401(k) type plan was the changing relationship between employer and worker. The idea of working for one company ones entire working life became an anathema; moving to a new job every few years was the path to opportunity. The decline of strong unions added to the mix.

In the 1980s consultants began convincing employers that employees did not appreciate pensions, they didn’t understand them and they couldn’t see the value. Besides we were told, workers weren’t going to stay long enough to benefit from a traditional pension, they needed something more visible and portable. Hence we moved from defined benefit pensions to hybrid (think cash balance) plans and ultimately to defined contribution plans like 401(k), 403(b), IRAs, etc.

It didn’t take long to learn that workers didn’t understand these new plans either nor did they understand the responsibility that was being thrust on them. As a result, the youngest of the baby boomers and later are screwed … Hey, let’s tell it like it is.

In order to have the kind of retirement most people want, including keeping up with inflation and rising health care costs (and they will continue to rise), all one has to do is save enough, invest correctly, manage the labyrinth of stocks and bonds, hope the market doesn’t crash just before you retire or anytime after you begin withdrawals from your retirement account, withdrawal at the correct rate in retirement and plan for ones surviving spouse. The other option is to save so much you can invest all your money in safe insured savings and survive on the pittance in interest… Good luck with that.

Investors feel powerless.

How’s that for making your pension value visible, understandable and portable? Sadly many (I’ll go out on a limb, most) people cannot handle all the issues in the previous paragraph.

Take a look at the results of two new studies here.

Now that our collective corporate and policy experts have gotten us into this mess, what do we do? There is a simple solution; work longer or just never retire. I wonder how corporate America will react to a workforce navigating the factory floor or corporate halls in those “free” scooters we hear so much about on television? I bet the cafeteria will have new menus when the average worker age reaches 80. Is there a senior discount?

Let’s face it, all seniors of the future are going to need an annuity stream of income to have any chance of a reasonable retirement that maintains their lifestyle. Social Security alone won’t do it unless you can meet your goals on 40% or so of your former income. There are two possible answers. We add a new component to Social Security that permits additional voluntary worker contributions to boost ones ultimate benefit (but gives more cash to Congress to “borrow,”)  or we add new and automatic annuity features to that plans we have. Perhaps the employer match in a 401(k) or 403(b) plan only buys an annuity. Perhaps those individuals with cash balance plans can only take a portion of their balance in a lump sum with the remainder paid in the normal form of benefit which is an annuity.

The idea that people will either save enough or effectively manage a lump sum distribution to have a secure retirement is overly optimist and there is plenty of evidence to support that. Employers who abandoned pension plans or cut 401(k) matches have shot themselves in the foot. In years to come workers will not be retiring and those that do will not be able to buy the goods and services that keep our economy growing.

An annuity pension is not only sustainable, it is essential.

Poverty rates for older Americans once again on the rise.

Us poor seniors

9 Jul

The following quote is from a NYT blog by Ezekiel Emanuel entitled Share the Wealth.

The story of older Americans is completely different. In 1959, over a third of those over age 65 were poor; today, only 9 percent are. Contrary to campaign rhetoric about old ladies on fixed incomes, many Social Security recipients are quite well-to-do: the median income of married couples between the ages of 65 and 69 is $61,000, and a quarter of these households bring in more than $100,000 each year.

This change is largely because of Social Security. What it means of course is that we have transferred wealth from younger to older Americans. The tax burden (nearing $4,000) on a typical family with median income of around $50,000 allows many of us seniors to do quite well. The median income for black families is $32,068.

All this and we get senior discounts at the movies, the bakery, public transit, many admissions, restrauants, golf, national parks, and we even get extra tax deductions. Talk about a world turned upside down on perpetuated stereotypes.

I wonder how many people realize that the Social Security benefit for a married couple can be as high as $48,000 a year for retirement in 2012. That is over 96% of the median family income in America or 76% of the average family income of about $63,000.

All you have to do to get on the gravy train is get old!

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Changing the “promise” of Social Security-what’s new?

18 Jun

Tax

Tax (Photo credit: 401K)

Today we battle over any changes to Social Security even those that do not impact current benefits or current beneficiaries. Even the mention of a future change in the method of calculating a COLA generates a claim of benefit reductions.

“I earned my benefits.” “I paid for my own Social Security.” “I’m entitled.” are all familiar cries of injustice.

All this nonsense in 2012 and yet in 1983 Congress made a major change in Social Security far more negative than what is being discussed today. Effective in 1984 up to 85% of the Social Security benefit was made taxable income for federal taxes. Talk about a cut in your take home pay. To make matters worse, the income level driving this taxation was not indexed for inflation.

And you get excited if the COLA in the future is less by a fraction of a percentage.

Read more about the taxation of Social Security here.

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The public union pension promise – “nobody did the math”

14 Jun

Once again we have an example of too much of a good thing in the public sector. I think it’s fair to say that public employees should receive competitive compensation and good, but affordable employee benefit programs. That includes health care and retirement benefits. In the private sector obtaining and retaining those things is a negotiating process where there is trade-off between cash and benefits and where the employer (and many responsible unions) consider the immediate and long-term impact on the employer. I negotiated such agreements for many years.

Sadly, in the public sector there is no motivation to consider such things. On one side you have politicians seeking to please unions and on the other union leaders seeking anything and everything they can get regardless of the consequences. The problem is that there are consequences and in many cases the negative impact is on the worker. Consider the following example from Providence, RI. No responsible party in a negotiation would agree to an annual 6% pension cost of living increase and yes, I bet the actuaries did do the math but it was ignored. The massive liabilities created by such a provision are so obvious it is laughable. Think about it, that 6% is probably double the normal wage increase for an active worker.

This type of situation occurs over and over and has for years. It is largely because of the great recession that the incestuous relationship between the parties in public worker labor negotiations has come to light. In the long run neither workers nor taxpayers benefit.

McLaughlin, 75, is the highest paid of Providence’s 3,000 retired workers, collecting a $196,813 pension this year, the result of yearly 6 percent cost-of-living increases the city once bestowed on firefighters and police. Lawmakers, facing a $1 billion deficit and squeezed for cash, ended the automatic raises and capped annual payouts. Now retirees such as Gillie, as he is known, won’t see their pay outs double every 12 years.

“No one ever did the math on this,” Paul Doughty, head of the firefighters union, said in an interview in his office above the bar at the Firefighters Memorial Hall in Providence. “I don’t think anyone had any idea that if Gillie lived to 100, he’d be making $700,000.”

Read more here from SF GATE

And then there is the news from California where true to form politicians align not with the citizens and taxpayers in general, but with the public unions.

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Why an automatic pension COLA is never a good idea. Social Security and state and local government pension plans make that clear.

14 Jun

Ida May Fuller, the first recipient

Ida May Fuller, the first recipient (Photo credit: Wikipedia)

Chicago, Providence. RI, the State of New Jersey, the federal government and many other entities are trying to deal with the cost of their employee pensions. Add to that the problems facing Social Security and you have a good case against the automatic cost of living allowance (COLA).

As with Social Security many public pension plans (and a few private) have built-in COLAs, some geared to inflation, some with annual caps, but others with fixed rates of increase each year regardless of actual inflation. In effect this puts pension increases on automatic pilot without regard to the ability to pay. Up until 1972 legislation, Social Security COLAs were only granted upon an act of Congress.

See below from the history of Social Security.

Faced with growing costs and liabilities public pension plans are cancelling COLAs or suspending them until the pension trusts are adequately funded. In many cases, retirees have received higher annual increase than active workers.

Not only do COLAs make predicting the cost of a pension plan that much more difficult, but the problem is compounded when COLAs increase during a downturn in the stock market (more benefits are paid as the value of assets are declining) and when the plan is underfunded for many years as is the case with many government plans.

I submit that keeping up with inflation in retirement is not the responsibility of a pension plan.

Rather, it is the individual’s responsibility through supplemental saving. Many, if not most, public entities have supplemental defined contribution plans in addition to traditional pensions. There simply is no need for COLAs plus supplement pension plans in the form of 403(b) or 401(k) plans. COLAs were added to traditional pension before defined contribution plans became common.

If a sponsoring entity, including the federal government is able to afford a cost of living increase on an ad hoc basis, that is one thing, but setting a COLA as part of plan provisions with no control over the costs they add is a bad idea. That point is being made perfectly clear today with unfortunate consequences for current and future retirees. Adjusting the COLA within Social Security will be in the forefront of reform to extend the solvency of that program.

The Story of COLAs [in Social Security]

Most people are aware that there are annual increases in Social Security benefits to offset the corrosive effects of inflation on fixed incomes. These increases, now known as Cost of Living Allowances (COLAs), are such an accepted feature of the program that it is difficult to imagine a time when there were no COLAs. But in fact, when Ida May Fuller received her first $22.54 benefit payment in January of 1940, this would be the same amount she would receive each month for the next 10 years. For Ida May Fuller, and the millions of other Social Security beneficiaries like her, the amount of that first benefit check was the amount they could expect to receive for life. It was not until the 1950 Amendments that Congress first legislated an increase in benefits. Current beneficiaries had their payments recomputed and Ida May Fuller, for example, saw her monthly check increase from $22.54 to $41.30.

These recomputations were effective for September 1950 and appeared for the first time in the October 1950 checks. A second increase was legislated for September 1952. Together these two increases almost doubled the value of Social Security benefits for existing beneficiaries. From that point on, benefits were increased only when Congress enacted special legislation for that purpose.

In 1972 legislation the law was changed to provide, beginning in 1975, for automatic annual cost-of-living allowances (i.e., COLAs) based on the annual increase in consumer prices. No longer do beneficiaries have to await a special act of Congress to receive a benefit increase and no longer does inflation drain value from Social Security benefits.

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Saving Social Security – beyond convoluted thinking

3 Jun

The following is from a New York Times letter to the editor May 29, 2012:

Re “Entitlement Reform for the Entitled,” by Ezekiel J. Emanuel (Op-Ed, May 21), proposing graduated eligibility for Social Security and Medicare based on lifetime wealth:

The reason Social Security and Medicare are called “entitlements” is that people are entitled to them: they’ve worked and paid for them.

The idea of a means test, which in effect this article proposes, violates the very spirit of the programs.

To “save” Social Security, all that is needed is the removal of the cap on earnings taxable for Social Security, something that Barack Obama the candidate said he’d consider but that President Obama, alas, has not actively pursued.

Let those who earn more, pay more. No more free rides for the upper strata.

Interesting perspective is it not? People worked and paid for their benefits, except if you earn more than the tax cap for Social Security you can pay more for your benefits that are the same for everyone who reaches the earnings cap. In other words it’s ok to pay for your benefits and for a few other people too as long as you are in the “upper strata” – meaning you earn  more than $110,100 a year. Surely the writer is not suggesting the maximum Social Security benefit be raised along with the taxation.

I wonder how many other Americans want to be taken care of by anyone who makes more than they do? You know, those Americans who are getting the  free ride. 

The truth, of course, is that there is no fair way to keep Social Security solvent because any idea will be viewed unfairly by some group. This is true even if the proposal merely lowers the growth of future benefits that do not exist today.

There are two other truths; the longer we wait to address the issues the more difficult it will be to solve and with the demise of the traditional pension and the inability or unwillingness of Americans to save for an adequate retirement on their own, Social Security is becoming more not less important to society.  How is that for a pickle of priorities?

Reality hits the New York Times. The economics of business in the real world leading to a pension freeze

26 Apr

The Newspaper Guild of New York reports on current labor negotiations with the New York Times. The Times, in the face of economic reality it is facing in running its business, is proposing a freeze of the defined benefit pension plan for its employees.

While I personally think such steps are reprehensible, they are the reality of this day and age and a step many private employers have taken. They do so because such plans are costly, liabilities are large and subject to fluctuation in interest rates and funding is subject to the whims of the stock market. Promises are easy to make, paying for them is another matter.

But there is some irony in such a proposal from the New York Times. The Times was not sympathetic to actions by various governors trying to address the same issues at the state level and in many cases not nearly as aggressively as the Times has proposed.

NYT blogger Paul Krugman saw the state issue as a scam claiming state workers paid sufficiently toward their pensions because they did so through low wages, ignoring the fact that states still didn’t have the cash to fund generous pension promises.

You can be as liberal and socially conscious as you like. You can sympathize with union workers, you can seek to provide a safety net for every human being on the planet, but sooner or later all those promises and good wishes run smack into reality. Those promises must be affordable now and in the years ahead and they must be paid for by a broad base of participants in society. Anything less simply does not work.

There are many who have learned this truth the hard way. General Motors, Greece, California, New Jersey, Wisconsin … and the New York Times come to mind.

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How confident are you about your prospects for a secure retirement?

13 Apr

I have been retired (sort of, I still have two very part time jobs) for a little over two years. I am fortunate to have a pension along with Social Security and after working forty-eight years, some savings as well. However, in the first two years of retirement my confidence in a secure retirement has been shaken a few times by high medical bills and unexpected high expenses like $4,000 to have trees cut following a storm.

I obsessed over my retirement planning. I knew my exact income in retirement and had a good estimate of expenses many years before I retired and updated the information frequently. In retirement I watch both expenses and finances carefully (a little too carefully according to my wife).

I am from another generation, a generation whose parents lived through the great depression as young people. Now look at the results of the survey shown below. It’s scary stuff, is it not? Little or no savings, more reliance on Social Security (designed as a safety net, not primary income source), and little planning happening. This does not bode well for the future, especially given the state of Medicare and Social Security.

We can’t blame this all in the economy of the last five years. In fact, saving and long term planning have never been top priorities for most people.

The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings March 2012 EBRI Issue Brief #362 Employee Benefit Research Institute, 2012

Executive Summary :   Americans’ confidence in their ability to retire comfortably is stagnant at historically low levels. Just 14 percent are very confident they will have enough money to live comfortably in retirement (statistically equivalent to the low of 13 percent measured in 2011 and 2009).

Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today. Worker confidence about having enough money to pay for medical expenses and long-term care expenses in retirement remains well below their confidence levels for paying basic expenses.

Many workers report they have virtually no savings and investments. In total, 60 percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.

Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that has grown to 37 percent.

Regardless of those retirement age expectations, and consistent with prior RCS findings, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure.

Those already in retirement tend to express higher levels of confidence than current workers about several key financial aspects of retirement. Retirees report they are significantly more reliant on Social Security as a major source of their retirement income than current workers expect to be.

Although 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 33 percent report that they and/or their spouse currently have such a benefit with a current or previous employer.

More than half of workers (56 percent) report they and/or their spouse have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement.

Only a minority of workers and retirees feel very comfortable using online technologies to perform various tasks related to financial management. Relatively few use mobile devices such as a smart phone or tablet to manage their finances, and just 10 percent say they are comfortable obtaining advice from financial professionals online.

Somebody is in for a bumpy ride in the future, especially given that our current mode of spending and borrowing will come due sometime when these folks are living in retirement.

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