Why You May Retire in Poverty
By Mark Miller, Reuters
Image Credit: Reuters/Mike Blake
Today's seniors are more affluent
than the general population. But the generations that
follow them - starting with the baby boom generation -
will not be as fortunate. The decline of pensions, the
erosion of Social Security and the housing crash all
are pointing toward a new crisis of poverty among
lower- and middle-class seniors in the years ahead.
Social Security and pensions, in particular, have been
the two most important factors in keeping seniors out
of poverty for decades. Both provide reliable,
guaranteed income sources for life. And home equity
has been an important fall-back source of assets that
can be tapped in retirement. That is because seniors
typically have more equity built up in their homes
than younger homeowners and carry less debt into
Indeed, the poverty rate for seniors in 2010 (the most
recent year available) was just 9 percent, compared
with 15 percent for the general U.S. population.
But the economic safety net is fraying quickly.
As recently as 1998, 52 percent of Americans over age
60 received income from a defined benefit pension,
according to a new study by the National Institute on
Retirement Security (NIRS). By 2010, that figure had
fallen to 43 percent. In the private sector, the
decline has been more dramatic - down from 38 percent
in 1979 to 15 percent in 2010.
The erosion is continuing, with automotive giants
General Motors Co and Ford Motor Co announcing plans
to terminate pension plans for hundreds of thousands
of retirees, and public sector plans facing financial
pressure to increase funding levels and curtail
How important are defined benefit pensions in keeping
seniors out of poverty? The study - which is based on
U.S. Census Bureau data - found poverty rates were
nine times greater in 2010 in households without
defined benefit pension income. Pensions resulted in
4.7 million fewer poor or "near poor" families and 1.2
million fewer families on various forms of public
Pensions are most important to middle- and
lower-income families. NIRS found that more than half
of households over age 60 receive pension income.
"We were surprised by the steep drop in income from
pensions," said Diane Oakley, executive director of
NIRS. "This can only accelerate as more boomers retire
without pensions in the years ahead."
Social Security plays an even more universal role in
keeping seniors out of poverty. The Center on Budget
and Policy Priorities estimates that 45 percent of
Americans over 65 would fall below the government's
official poverty line if they did not receive Social
Security benefits. According to the Census Bureau, the
number of elderly people in poverty would have been
higher by almost 14 million in 2010 without Social
While Washington debates whether we should sacrifice
Social Security benefits to deficit reduction, most
people do not realize benefits already have been cut
substantially. That occurred in the reform package
passed in 1983, which set in motion a gradual increase
in the age when seniors could file for full benefits -
the so-called Normal Retirement Age (NRA). The NRA is
rising from 65 to 67 for people reaching that age in
2022. At that point, monthly benefits will be about 13
percent smaller than if the retirement age had
remained at 65, according to the National Academy of
The main reason: a higher NRA translates into a
benefit cut for everyone - no matter when you retire.
That is because it raises the bar on how long you must
wait to receive a full benefit.
What about our system of tax-advantaged retirement
savings - chiefly 401(k) and Individual Retirement
Accounts (IRAs)? Will they come to the rescue? Perhaps
for affluent households. But they are just not getting
the job done for the vast middle.
Just 14 percent of households report they expect to
have enough money to live comfortably in retirement,
according to the Employee Benefit Research Institute.
Sixty percent of households tell EBRI that the total
value of their savings and investments - excluding
their homes - is less than $25,000.
It is striking just how little attention is paid in
Washington to the looming retirement crisis. Alongside
the decline of pensions and Social Security, seniors
face rising healthcare costs and the possible
weakening of Medicare if it is converted to a defined
contribution "premium support" as advocated by the
Republican-controlled House of Representatives.
Likewise, seniors have seen their home equity drained
by the housing crash. The AARP Public Policy Institute
reported recently that 3.5 million homeowners over age
50 are "underwater" on their mortgages, meaning they
owe more than their properties are worth. Seniors are
carrying more debt into retirement and have less
flexibility to tap home equity to meet expenses.
The only viable solution for seniors without savings
will be to work longer - a great strategy if you can
pull it off. Working longer allows you to delay Social
Security filings, adding substantially to annual
benefits down the road.
Social Security benefits are calculated using a
formula called the primary insurance amount, or PIA.
Seniors who wait to start receiving Social Security
until their full retirement age (currently 66) receive
100 percent of PIA. Take benefits at 62, the first
year of eligibility, and you will get only 75 percent
of PIA. By waiting until age 70, you receive 132
percent of the PIA - nearly double the monthly income
for the rest of your life. Those benefits are enhanced
by an annual cost-of-living adjustment, which is added
back in for any years of delayed filing.
But working longer is not always possible. An annual
Retirement Confidence Survey by the Employee Benefit
Research Institute (EBRI) found that 50 percent of
retirees left the work force earlier than planned this
year. The reasons cited included health problems or
disability (51 percent); changes at their company,
such as downsizing or closure (21 percent); or having
to care for a spouse or another family member (19
A range of modest policy ideas to address the looming
retirement crisis has been rattling around in
policymaking circles for several years. Examples
include the Automatic IRA (requiring employers who do
not sponsor a pension plan to automatically enroll
employees in an IRA); expanded saver's credits for
lower- and middle-income workers; and expanded
catch-up contributions to IRAs.
The Obama administration is pushing a set of policy
changes aimed at encouraging use of commercial
annuities within workplace accounts as a way of
plugging the guaranteed income gap - an idea that can
work for those who have actually accumulated savings.
Bolder ideas have been percolating at the local level.
Several states are considering innovative ways to
replace the decline in pensions by creating new hybrid
cash balance pension plans.
In California this month, lawmakers will consider a
proposal to create a Secure Choice Retirement Savings
Plan, which would allow private employers to set up
pension plans for their employees using the
infrastructure of the state's public sector plan.
Contributions would be made through payroll
deductions, and the plans would use a cash balance
model, where participant benefits would be expressed
as a virtual account balance and converted to monthly
annuity payments at retirement.
And last week, Senator Tom Harkin, who chairs the U.S.
Senate Committee on Health, Education, Labor &
Pensions, laid out a similar concept for a hybrid
workplace cash balance pension model at the national
level. Harkin's plan would call for mandatory
participation by employers who do not offer a minimum
level of retirement benefit via automatic payroll
"We ought to be talking about this," Harkin told
reporters on a conference call. "It's a crisis in our