A Gallup study of how working age Americans see their retirement income reveals significant concerns. They will continue to rely on Social Security, pensions, IRAs, 401(k)s and other savings, but for many, total income will be so inadequate for retirement that employment after retirement age is inevitable for many.
Some traditional sources of retirement income work poorly for today’s workers. Defined benefit pensions plans at one time covered many workers, but many plans have been discontinued or converted into defined contribution pensions. Now, just 25% of working age Americans expect to rely on a defined benefit pension as a major source of retirement income. In times of low interest rates, income from defined contribution pension fund investments can be quite low.
Likewise, when interest rates are low, the value of personal savings, or IRA, or 401(k) funds will grow slowly, basically at the pace of contributions plus one or two percent.
Social Security retirement benefits grow a small amount with each year’s employment and Social Security tax paid. Those at a low income level receive benefits that are a higher percentage of their working years’ income than benefits received by those at higher income levels. Even so, Social Security retirement benefits can be just $800 per month for many – insufficient for retirement. Nevertheless, 36% of working age Americans expect Social Security to be a major source of income.
For decades, a family house was treated as a retirement asset because it would increase in value and could be sold to provide retirement funding or, when the mortgage was paid, could be occupied by retirees at very low cost. House prices have grown very little since 2009, and the pace of future price escalation is uncertain. Also, Millennials are undecided about purchasing homes, so houses may play a smaller role in their retirement.
For all groups, the most relevant hope for retirement income is compounding of interest rates. As workers scan the horizon, they see an underperforming economy and poor prospects for interest rates that could fuel their retirement income, at least in the next few years.
Domestic growth is very slow. In the latest quarter, GDP grew by 0.2% in the first quarter of 2015 and inflation ran -0.1%.
Ten-year Treasuries yield less than 2 percent. The Federal Reserve hopes to increase interest rates to “normal” levels, such as 5 percent for 20-year Treasuries, as they were during parts of 2006. Today, an almost stalled economy may delay those plans. Many observers expect the Federal Reserve will increase rates just 0.5% in the next 12 months. That will not help retirement funds grow by much.
The labor market is working poorly for many. Millions want a job and cannot get one. Sixty-five million have decided not to participate in the market. Some of working age have chosen early retirement, some don’t need to work, and some have just given up looking.
Even for those with a job, wage growth is very low at 2.6%, and productivity grew just 0.1% from the 4th quarter of 2013 to the 4th quarter of 2014. Productivity is a factor that allows wages to increase, but at its subdued level, it cannot help incomes much. When labor income grows slowly and worker headcount is constrained, the tax burden falls on a smaller group of payers and that dampens their ability and enthusiasm for investing. Low investment will produce few jobs over the short and long run. We must hope there will be enough jobs for the two-thirds of working Boomers who want to retain employment beyond age 65.
Consumers in all groups are reacting appropriately to the uninspiring economy. We will wallow in this pathetic state unless we face a genuine stimulus such as an infusion of hope, a cause that unites us, or a sharp reduction in sour partisanship.
Leaders who threaten to “topple the 1%” or who give rioters safe space to destroy things show no competence at uniting us or at sparking economic growth. We deserve better – a leader who understands the role of investment in creating worthwhile jobs, a leader who understands how to engage the whole team, not just some reliable partisans. We’ll need to carefully recruit the right leader, one who is not yet evident.
Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research