Americans too dependent on Social Security for retirement

back

Americans too dependent on Social Security for retirement

Maria Garriga, New Haven Register

January 12, 2004

Are you prepared to live in poverty when you retire?

A new report shows that, despite repeated warnings Americans are saving less than ever for retirement, and depending on Social Security for most of their post-retirement income.

Douglas Fore, a senior research fellow at TIAA-CREF, one of the nation’s largest pension funds, has published a report titled "Do We Have a Retirement Crisis in America?"

He found that nearly half of retired persons depend on Social Security as their primary source of income, although it provides only 40 percent of the average pre-retirement wage.

Social Security paid an average monthly benefit of $902.60 to retired workers in 2002.

In the article, published in the TIAA-CREF Institute Quarterly in November, Fore identifies several reasons to expect a crisis:

• A decline in pension plans with lifetime payouts.

• A decline in the personal savings rate from 11 percent in the early 1980s to 4 percent in 2002.

• An aging population that places additional burdens on social programs.

• Tax cuts.

• The growth in government spending, especially on defense.

Fore adds that many employees simply don’t have the financial knowledge to handle their own retirement investments.

For example, many employees cash out their plans when they switch employers, losing years of savings in the process.

Retirement savings surveys shore up Fore’s arguments. According to the 2002 Retirement Confidence Survey, 44 percent of retired persons 60 and older have saved $75,000 or less, while 11 percent have saved nothing.

For those baby boomers who still believe that Social Security will bail them out, consider this: Last May, James B. Lockhart, deputy commissioner of the Social Security Administration, told the National Press Club that the "pay as you go" financing of Social Security has become unsustainable.

Lockhart said there are too many retirees in proportion to workers paying into Social Security, meaning Congress may have to enact massive payroll tax increases or Draconian cuts to Social Security benefits.

Either way, baby boomers who want to retire will need to depend more on their own savings.

"Social Security is fine for the time being, but personal savings is more important down the road. You will have to rely on what you saved," said Pam McNulty, manager of the TIAA-CREF office in Hamden.

Branford-based financial consultant David Chorney said he sees this pattern with many new clients.

"About 75 percent don’t really understand what it’s going to take to live one-third of their lives without earned income," Chorney said.

Most don’t realize how much inflation will eat into their savings either.

For example, assuming an average 4 percent annual inflation rate, it will take $109,556 in 20 years to buy the same amount of goods that $50,000 will buy today, Chorney said.

There are two ways to deal with the problem: Lower your expectations and increase your savings.

Chorney recommends immediately setting aside three months of income or six months of expenses as an emergency fund. Often, emergencies such as needing a new car or furnace derail retirement-savings plans.

Once you have that in place, make sure you are contributing to the maximum allowed by your employer’s retirement plan.

Then consider putting money into an Individual Retirement Account.

Finally, and most important, make savings a priority.

"If people saved for themselves, we would not have a retirement crisis," Chorney said.

McNulty urges people to try automating savings as much as possible.

"For example, if your employer offers payroll deductions into your retirement savings plan or your IRA, use it so you don’t even see the money," McNulty said.

Often, banks allow you to have funds sent directly into an IRA.

She also cautions that savers should diversify their investments among different asset classes, such as bonds, cash, stocks and real estate.

She recommends at least three different asset classes.

"By diversifying your investment in your retirement, you’re minimizing your risk," she said. "It’s not just how much you’re saving, but how you are saving that is so important."