Retirees Face Uneven Recovery

The economic fortunes of American families are evolving at different paces after the great recession. From nearly 10% in 2009, unemployment has dropped to 4.9% today. During the recession, many abandoned their place in the labor force and the participation rate remains low today. The median family faces stagnation in income and net worth following erratic stock market performance, preposterously low interest rates, a slow recovery in housing values, and slow growth in gross domestic product. Employment levels have improved, but wages are stalled and many cannot find full time work.

Ready or not, millions of Boomers are arriving at retirement age. The desperate financial conditions of many are problems that we cannot ignore. Demographic factors are working against us. The wave of Boomers reaching the notional retirement age of 65 will continue for another decade. Currently, 40 million of the US population is aged 65 or more. They face a broad cluster of financial challenges.

Life expectancy for a person reaching age 65 is another 19.3 years, up from another 17.4 years in 1995. The two-year elongation of life for retirees increases the challenge of funding retirement by 10%. In 2014, 23% of those 65 and older remained in the workforce, up from 18.5% who did in 2004. The jump in seniors’ participation is a response to the need for continued employment income.

Most retirees will be eligible for social security and Medicare benefits, putting additional strain on giant programs “funded” with Treasury IOUs. Of those eligible for private or government pensions, many will be underfunded and most will be of the defined contribution ilk, generating less income at today’s interest rates than expected when actuaries designed the pensions under assumptions of 6% and 7% yields on assets.

Median income dropped from $49,000 in 2010 to $46,700 in 2013. The median net worth of US families fell from $87,700 in 1995 to $81,400 in 2013. Income levels are stuck partly because productivity growth has fallen by half since 2005.

In the last decade, low interest rates have undermined the growth in family savings. On January 1, 1995, the 10-year US Treasury note yielded 7.78%, making it a prudent allocation for at least part of retirement savings. But today, a retiree who buys a 10-year Treasury note will earn 1.9%, resulting in 76% less interest income compared with two decades earlier.

In earlier times, the family home was implicitly a retirement nest egg. In 2006, home prices began dropping quickly and did not recover until the second quarter of 2015, even though mortgage rates made homes eminently affordable. This means the residential nest egg sat moribund for a decade.

Retirement vehicles such as 401(k) and IRAs were brutalized by a stock market that dropped by about half in the recession but then almost tripled. Savers who pulled their money out during the market’s descent lost much of their nest egg. Many of those who were patient recovered nicely.

The tumultuous financial conditions of the recent decades did not affect all of us equally. Some aged 65 or more have social security, pensions, income from substantial net worth, and ongoing employment that adequately funds their retirement, but the plight of retirees in the lowest quintiles of income is dire. In 2013, the median earner in the top decile had a net worth about 13 times more than the median household.

The stagnant incomes of most families should add urgency to new federal and state programs that address low-income needs. If done right, the programs will give a hand up, not a hand out. Whining about 1%ers is not constructive, but it is a common mask to distract from shirking of personal responsibility. Programs should educate recipients to better compete against our international rivals. Such programs will help foster cohesion between social classes instead of inflaming divisiveness between taxpayers and welfare recipients. On the other hand, education does not pay dividends promptly and millions more will retire before they are financially ready. That will increase the political temptation to launch income redistribution schemes which dampen growth. There is no easy fix.