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Retirement Crisis Looms As Many Come Up Short

By : Christine Dugas

USA Today, July 19, 2002

Crippling stock market losses and shortcomings in the U.S. pension system are creating a retirement crisis that has hobbled retirees and workers on the cusp of retirement and threatens even those in their 30s and 40s. Already, nearly half of those saving for retirement, 46%, say they will have to postpone retiring because of the shrinking stock market, according to a USA TODAY/CNN/Gallup Poll. But stock-market losses are just one symptom of a larger crisis, many experts say. Forget, for a moment, people panicked about retirement plan losses. More than one-third of adults say they have no money saved in any kind of retirement account, according to the poll.

The retirement system just isn't working for a lot of Americans. Many don't have access to a pension or retirement savings plan at work. Others choose not to join their 401(k) plan or get a late start and don't contribute enough. Workers often don't know much about investing and don't care to learn, often letting their portfolios languish in overly conservative investments or going overboard on company stock.

The prognosis is grim, especially for middle-class families. "The average American household has virtually no chance to reach an adequate retirement savings in the next 50 years," says Christian Weller, a retirement specialist at the Economic Policy Institute. Retirement dreams are taking a beating:

37% of those saving for retirement say they are doing only a fair job of managing their retirement portfolios, and 7% say they are doing a poor job.

44% of those saving for retirement say they expect to live less comfortably in retirement, according to the poll.

29% of retirees say their standard of living has gone down in retirement.

Single women are among the most vulnerable. Linda Peterson, 57, works as a freelance writer in Arlington, Va., after being downsized out of a job. Widowed more than a decade ago, she has a small pension from her husband's job and another from a job she previously held. Together, they will provide about $800 a month in retirement.

Though she has some savings and will receive Social Security benefits when she retires, she calculates she still needs to save $300,000 to $400,000.

She doubts she'll make it. At the moment, she says, it's a stretch to find extra cash. Though friends are starting to retire, Peterson plans to work full time until she's 67 and, after that, part time.

"It's not fun," she says. "But I welcome a period of being underemployed, because it's a preview of what retirement will be like."

The broken contract

It wasn't supposed to be like this. For years, there was an implicit social contract: If you worked hard for a company, you'd be rewarded with financial security in retirement. Of course, there were always gaps in the traditional pension system, which mostly covered workers at large manufacturing companies. But today the social contract is on shakier ground than ever, many experts say.

"It's an untold secret," says Karen Ferguson, director of the Pension Rights Center. "You can work a lifetime and do everything right and not be able to pay your bills in retirement."

Paul "P.J." Palombo will be 62 next month. A long-distance truck driver for Kimball International, Palombo started contributing to a 401(k) plan in 1982. When he switched jobs, he rolled the money into an individual retirement account and contributes yearly. "I got in when the getting was good, and it grew from zero to almost $250,000," he says. "I said, 'This is great! I can retire at 55.' "

But the bear market has ravaged his portfolio. "I've lost close to $50,000 this year alone. I've got thousands of shares of mutual funds, and if I sell now, I've lost it all."

Palombo, who is single, isn't sure when he can retire. He jokingly says he'll have to work until he's 137 years old. "Then I'll have to supplement my retirement by flipping burgers at some interplanetary burger joint 37 light years from the planet, and I'll still be quite poor."

The U.S. retirement system was structured so that retirees could count on three sources of income: Social Security, pension benefits and personal savings. Social Security now faces a 75-year deficit and was never intended to fully support workers in retirement. But 44% of retirees say it is their primary source of income, according to a survey by the Employee Benefits Research Institute (EBRI).

As the Social Security system has come under stress, the private pension system also has been radically transformed. Companies shifted away from traditional pension plans, which guaranteed benefits to retirees for as long as they lived.

Instead, most offer "defined-contribution" plans, such as 401(k)s. They put the burden on workers to sign up, contribute and decide how to invest. As an incentive, many employers offer matching contributions.

But companies on average contribute only 2% of pay to 401(k)-type plans, compared with 6% to 7% of pay that they typically contributed to traditional pension plans, says Brooks Hamilton, a retirement plan consultant in Dallas.

During the long-running bull market, there were few complaints from workers, who dreamed big dreams as their 401(k) portfolios jumped in value.

Last October, Mitch Meyers, 47, gave up a 20-year career in the defense industry. He moved to Las Vegas and took a job in a casino, expecting that by the time he reached his 60s, his savings would be worth close to $1 million. Instead, his nest egg, worth $340,000 in October, has shrunk to just over $200,000. He is seeking to return to a job with the government or a defense contractor.

Of course, younger Americans have more time for investments to recover and more working years in which to save for retirement.

Joseph Hannan, 73, has seen the value of his estate dwindle as the stock market has fallen. He uses frequent-flier credits amassed during a career in international sales to visit his four children, scattered around the country. But most of his discretionary income has dried up, and he recently canceled a planned cruise. "It's too late for me to do anything but bite the bullet and hope it comes back," says Hannan, a retired oil company executive from Centennial, Colo.

Falling below the poverty line

The current market downturn, which has stretched into the longest bear market since the Great Depression, has focused attention on the pitfalls of do-it-yourself 401(k)-type retirement savings plans. The conclusion of several recent studies: Many workers will be shortchanged in retirement.

Most experts say retirees need 75% to 80% of their pre-retirement income. Yet more than 40% of middle-age households won't be able to replace even half of what they made on the job, according to a study by the Economic Policy Institute. And nearly 20% will have retirement incomes below the poverty line. The study, based on federal data between 1989 and 1998, does not even take into account the bear market.

New research on the retirement security of workers in Kansas found that the shortfall between retirement income and the cost of health care, food and housing for the elderly in Kansas could reach $700 million a year by 2031. The report by EBRI and the Milbank Memorial Fund focused on Kansans ages 38 to 66.

Jack VanDerhei, a Temple University professor who created the model used in the analysis, calls the results sobering and says he believes that studies in other states would produce similar results.

Studies that focus on account balances in 401(k) plans often give an overly optimistic picture of retirement savings. That's because high-income workers skew the results. At the end of 2000, the average account balance was $49,024. But 44% of participants had balances of less than $10,000, according to an EBRI/Investment Company Institute database.

High-income workers not only can afford to save more in their retirement plans, but they typically get a better investment return.

At one company he studied with more than 5,000 employees in its 401(k) plan, Hamilton, the Dallas retirement consultant, found that workers at the bottom 20% of the pay scale earned 6.48% on their contributions in 1997, compared with a 28.27% return posted by the top 20%. The pattern was the same at three other companies. Lower-income workers tended to opt for more conservative investments, in part, Hamilton suspects, because some are less-sophisticated investors and others are unwilling to take risks with what may be their only savings.

"We've got the makings of a disaster," Hamilton says. "A lot of people will reach retirement in despair."

Though not everyone agrees with such dire predictions, they generally concur that workers who are closest to retirement will have a hard time recovering from years of inadequate savings and steep stock market losses.

But many younger workers are also nervous. Christine Viera, 32, a stay-at-home mother of two and a former legal secretary from Danvers, Mass., is not optimistic. Her husband, a carpenter and warehouse manager, has a retirement annuity through his union. She plans to return to work in a few years and will put aside money for retirement. But Viera expects that Social Security will have vanished by the time she and her husband retire. The volatility of the stock market scares her. "My fear is that someday we'll have to move in with the kids and have them take care of us," Viera says.

Even if Social Security is still available when Viera retires, the benefits are gradually declining. In 1990, Social Security benefits replaced 43.2% of the pre-retirement income of the average worker. That will slip to 36.7% by 2030.

"The scheduled reductions will hurt middle-income families," says Alicia Munnell, director of the Center for Retirement Research at Boston College. She is even more worried about the toll the cuts will take on the 50% of workers who don't have a company pension or 401(k) plan.

The Enron debacle — and stock collapses at WorldCom, Lucent Technologies and elsewhere — destroyed the retirement savings of many workers overly invested in their employer's stock. In response, lawmakers are trying to pass legislation that mostly would ensure that workers are not locked into company stock. They are also focused on ways to provide more advice to workers on how to invest their 401(k) plan assets. But many retirement experts say Congress is being myopic.

Band-Aid solutions

Though some workers would certainly benefit from professional advice, it wouldn't help those who don't have access to a 401(k) plan or can't afford to contribute to one.

"Enron, Global Crossing and WorldCom should have been a wake-up call alerting policymakers and the public that our private retirement policies are going in the wrong direction," Ferguson says. "Instead, members of Congress are ignoring the inevitable consequences that many more millions of retirees will be without enough money to make ends meet."

Some experts would like to see a return to traditional pensions. Edward Wolff, a New York University economist, says Congress could give tax incentives to encourage companies to switch back.

Others say that's an unrealistic goal. They say there are ways to improve 401(k) plans. For instance, Congress could mandate company contributions for all workers, even if they don't contribute to the plan. Others suggest that Congress require automatic enrollment in plans with the option to opt out, prohibit company stock as an investment option and provide workers with an inflation-adjusted annuity when they retire.

But some retirement experts warn that companies may drop 401(k) plans if the measures are expensive or tough to implement.

And none of those reforms would protect workers from the risk that the stock market will tank just before they are ready to retire. That hazard also has cast doubt on proposals to put a portion of Social Security benefits into private investment accounts.

"We need to have a discussion about whether we truly want to put the average person at so much risk," Munnell says.

As Ferguson puts it: "There is an enormous amount riding on making sure the pension system pays off for older Americans."

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