America is Clearly Transitioning toward a New Paradigm for Retirement

I read an online article at a blog called " GoToRetirement " this week that really got me thinking about what it means to have a "Retirement Plan” and a better understanding of planning for retirement. I encourage my readers to review this blog entry and consider how the points raised apply to each individuals current situation.

The sad fact is that most people between the ages of 50 and 60 still do not have a formal retirement plan. Recent economic events have impacted this age group more than almost any other, since most in this group have been hit with a double whammy of declining home equity and declines in the value of traditional securities investments in a 401k or other qualified pension plan, if they have an employer that still offers one (or still have a job). They are also the same group of people that has been setting records for consumption, borrowing and spending for years. Now they are a key target group for employers seeking to cut costs and pension liabilities as many are highly compensated (or better compensated because of seniority) and nearer to retirement.

For people under 50 the recession has reinforced the need to give more thought to what it means to have a formal, written "Retirement Plan". This is a good thing since most Americans devote less time to planning for retirement than they do to plan for annual vacations. I know it is far more fun to think about and plan for travel fun and games than to devote time to thinking about an uncertain future, but at the same time people of all ages should at least consider the hard facts of retirement in the United States. Take a look at a chart I have used before, which reflects data from before the start of the recent recession (the good old days).

This information is even more important for people under 50 because they must become more involved in planning for their own retirement, in order to have one.


In the "good old days" of retirement, only 2% of retirees were self sustaining and I suspect that most of those were people who had earned far more than they needed to spend plus those who knew how to invest. Given recent events, a very high percentage of people currently between 50 and 60 are probably facing the reality of working well into their 70's in order to build retirement reserves to reasonable levels. They will also have to spend far less and save much more than they ever did.  This means a lower standard of living now in return for a better standard of living later. This will be the toughest financial challenge the Baby Boomers and Echo Boomers will ever face.

What Ever Happened to Self Reliance?
Several generations born after 1950 have relied on Corporate “generosity” or on the mistaken belief that a benevolent government would continuously increase the benefits available to retirees through Social Security and somehow guarantee those benefits in the face of a declining workforce and an ever increasing base of retirees who are living longer than ever after retirement. In both cases Americans are in for a huge shock.

The Corporate retirement promises made to employees (when America was the dominant and most profitable industrial power in the world) have already been broken (think Enron, WorldCom and now the struggling U.S. Automakers or Airlines). Ridiculous actuarial assumptions of unsustainable corporate contribution levels, investment results and continuous growth of new employees to backstop promises to old employees have fallen far short of reality. Today profit margins for U.S. industry must be competitive with global competitors. Global labor rates are often below our poverty levels and offering fewer (if any) benefits. This means that less domestic corporate profits are available to fund pension liabilities for past and future employees of U.S Industry. The general decline of U.S. manufacturing jobs means less new funding for existing plans that were designed to need ever more new funding from a growing, young work force.

Government Retirement Plans are Unsustainable
Those who have been part of State and Federal retirement programs who have retired or will retire in the next few years can expect to receive pension benefits that far exceed the contributions they made. This is especially true given the actual investment results obtained by pension managers. Fortunately for these employees, the failure of the pensions they participate in is backstopped by taxpayers who will never receive a dime of benefits from the plans they will be forced to backstop through new taxes. In California the $50 Billion of recent financial losses in the CalPers pension program is a perfect example of this scenario. Promises of 100% of salary at retirement, with Cost of living increases and full medical coverage will probably be met, but at what cost to taxpayers who are not participants in state pension plans? Clearly new hires coming to work for a cash strapped state governments will eventually have to make concessions in the structure of their pension plans to accommodate financial realities, if they are even offered a pension plan.

Of course anyone who is qualified or interested has (or had) the option of going to work for the government in order to obtain the benefits of long term employment by the government. But what about the taxpayers and entrepreneurial business owners who do not work for the government who will have to pay more taxes to fund government pension liabilities that could go to fund their own retirement goals? How far will “free market” business people go to financially support the pension miscalculations and investment mistakes of government retirement plans?

In recent years, government employment has skyrocketed, but not all jobs include benefits at “grandfathered”  levels and many positions (e.g. postal employees) are being offered on a contract basis with no benefits. Have you noticed too that the Government calculations for Cost of Living Adjustments  conveniently show that there is no need for an increase in current payouts?  Somehow the calculations have the result of saving the government hundreds of millions, perhaps billions of dollars in Cost of Living adjustments. Have you also noticed that most products and services for retail consumers are more costly than ever?

So what about those of us who have been most affected by the recent harsh recession or those of us who recognize the necessity of facing harsh facts about our age and financial position? The bottom line is that we must start investing time in a true plan for retirement in order to have resources for a reasonably comfortable retirement or any retirement at all.