US Retirement System – The Next Obama Overhaul?

“A nickel ain’t worth a dime anymore.”

If you’re a baseball fan, you’ll likely remember Hall Fame Yankee catcher, Yogi Berra, who became best known for his humorous, cracker-barrel one-liners, including the above quote. His point, although made in the 1940’s, is just as true today. Uncertain future inflation and the erosion of future purchasing power is one of many factors which make financial planning for retirement so extremely difficult and why the government is feverishly studying how to secure today’s very shaky retirement system.

While the country attempts to digest the long-term impact of the recently passed healthcare bill, today’s administration has its eye on another major problem and much needed overhaul: the retirement system. In fact, government studies and recently proposed legislation cite the need for major changes in today’s retirement system in order to pre-empt financial disaster for middle class Americans, not just a disadvantaged few. Perhaps because the “tsunami” hasn’t hit, we have yet to see media headlines regarding the impending retirement crisis, but the government is working feverishly to devise, at least partial, solutions.

A number of potentially disastrous issues have the keen attention of the White House, including the following: (1) the largest generation in the history of the nation, the baby boomers, has begun entering retirement and will continue to do so for another fifteen to twenty years. In sheer numbers, the “belly of the python” should enter retirement in the year 2016. Some estimates forecast the number of retirees in America to double within the next generation, while the number or workers supporting them will significantly decrease; (2) the decline in the value of financial assets has been coupled with an equally dramatic decline in home prices across America, which has further diminished workers’ retirement security by eroding the value of the largest single investment for many middle-class families; (3) the shift from defined-benefit pensions to 401(k) and other defined contribution plans has left more workers than ever before to plan their retirements for themselves and to bear the risk of retirement investing alone; (4) Social Security is expected to meet a mere 40% of income needs for most retirees; (5) even for workers who save at recommended rates for their entire lives, dutifully stashing away funds into their 401(k) and IRA plans, the possibility of another market “disruption” always poses serious risks, as the recent financial crisis so tragically illustrated; and, finally, (6) the predominate use of defined contribution plans (unlike the good old days when retirees received a gold watch and a pension check for life from employers) leaves retirees and their savings exposed to the three great unknowns: (a) an unknown life span; (b) an unknown investment return; and, (c) an unknown future inflation rate.

With such tremendous financial vulnerability in retirement, those high up the government food-chain are researching how to avoid a potential train wreck. Translation – our federal government can’t afford the expense of providing huge supplements to Social Security in order to ensure our seniors avoid impoverishment. With little fanfare to date, the federal government has been carefully studying the above issues. In early 2010, the White House Task Force on the Middle Class produced a report which confirmed its worst retirement fears and stated, “The current system does not provide sufficient retirement security for millions of Americans.” The report went on to suggest promoting the availability of guaranteed lifetime income products, which transform at least a portion of retirees’ savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their standards will be eroded by investment losses or inflation.

The U.S. Government Accountability Office, in a July 2009 report, noted that, “Workers covered by defined contribution plans, in particular, risk making inadequate contributions or earning poor investment returns, while workers with defined benefit plans risk future benefit losses, due to lack of portability if they change jobs.” The “Retirement Security Needs Lifetime Pay Act of 2009” was proposed on June 8, 2009 by Congress (H.R. 2748) and reaffirmed on June 18, 2009 by the Senate (S. 1297). The two bills are nearly identical and propose to amend the Internal Revenue Code of 1986 to encourage guaranteed lifetime income payments from annuities by excluding up to 50% of lifetime annuity payments received under one or more annuity contracts, up to a maximum of $20,000 and otherwise includible in gross income in a taxable year. Some are suggesting the creation of Guaranteed Retirement Accounts (GRAs), which would give workers a simple way to invest a portion of their retirement savings in an account which is free of inflation and market risk. Finally, the Department of Labor included in a recent agenda an initiative by its Employee Benefits Security Administration (EBSA) to promote annuities for all workers as part of 401(k) and other retirement plan benefits. Studies performed by other credible sources, such as Ernst & Young, confirm the impending retirement disaster.

All studies seem to agree on one partial solution: Americans need to supplement Social Security with more guaranteed lifetime income. In other words, while Social Security is the government’s lifetime income to recipients, it now appears that the government wants Americans to supplement Social Security with their own “private layer” of guaranteed lifetime income. Essentially, the message from policy makers is to encourage Americans to take some portion of their defined contribution plans and purchase an added layer of guaranteed lifetime income to supplement Social Security. The size of the additional “lifetime income” layer is something which each individual needs to determine, based upon needs and resources.

Whether Republican or Democrat, for or against government management or interference in our private lives, we all care about the fate of those in retirement, particularly if that includes us, or soon may. Though lifetime income via private annuities is unlikely to become a legislative mandate, I believe it’s a positive for the government to offer incentives to Americans who buy them. Consider this: if you had the resources available, wouldn’t it be wise to purchase enough guaranteed lifetime income, adjusted annually for inflation, such that, when added to Social Security, guaranteed income would cover your basic needs for as long as you live? Any extra funds you could then use for vacation and fun or bequeathing to heirs, but you wouldn’t have to lose sleep over the prospect of winding up in the poor house. If able to cover the great financial unknowns, why would you gamble with your financial future?

Ironically, and regardless of government initiatives, the most challenging retirement hurdle may lie within our human nature. The psychology that seeing a lump sum of money in your monthly statement feels better than seeing a modest monthly income check, even if you live to be 105, is difficult to overcome. And, until the time arrives, it’s so difficult to see ourselves as old or to understand how swiftly savings can waste away. But, unless you are extremely wealthy, the great unknowns (investment returns, inflation, longevity and major market disruptions) may just bring you to your financial knees, should you live long enough. The real question is, “Can you take the actions dictated by prudence and wisdom or will your feelings dictate your financial future?” I welcome your opinions.

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