It was a period in which the United States came alive: After the second world war and the preceding 10-year economic depression of the 1930s, the country enjoyed a period of tremendous economic expansion and societal transformation.
Military veterans returned home ready to resume their lives, begin careers and start families. This produced a large demographic shift, with tens of millions of people moving from the cities to the relative peace and serenity of the suburbs, which they hoped would be a better place for their children to grow up.
From 1946 through 1964, over four million children were born each year. Home ownership rates soared and one car in the driveway and one in the garage became the norm, or at least a dream, for middle-class families.
The oldest of these postwar children – the baby boomers – turned 65 in 2011 and have entered their glide path toward retirement. Between now and 2029, 7,000 people each day are expected to retire – a large number that presents unique financial challenges to individuals as well as to the broader society.
As in many advanced industrial nations, most US workers are not ready for what lies ahead. This sad fact keeps government policy-makers as well as older workers awake at night worrying about the future.
Help will not come from the government. The Social Security and Medicare systems are already under stress, and this will only increase as the number of baby boomers leaving the workforce swells. There will be less revenue as people stop working and paying taxes, while the government will need to spend more to meet promises made to retirees during the time they were employed.
State and local government pension and retirement plans have parallel problems. Over the last 35 years, there has been a significant erosion in the number of private employees enrolled in traditional defined benefit plans. All of this means an increased focus by policy-makers to find ways to increase private retirement savings, particularly among aging baby boomers, a high percentage of whom are not prepared for their looming retirement.
© Jan van Holleben
The problems facing aging baby boomers have been made worse by the 2008 financial crisis, which caused major losses to 401(k) and personal savings accounts. High unemployment and underemployment have also caused many to have to tap into retirement savings.
While the Democratic and Republican parties disagree on nearly everything, almost everyone believes that more should be done to promote retirement savings. This is easier said than done, as the preferred approach – tax incentives or tax credits for lower-income individuals – costs the US Treasury money. This is something that it can ill afford given the massive size of the budget deficit.
Both parties support tax incentives to save more, with the Democrats perhaps differing by saying that with present fiscal realities consideration should be given to limit tax benefits currently received by upper-income individuals who, they say, would save money anyway. Instead, they argue that the appropriate focus should be to assist middle- and lower-income individuals, a large number of whom are completely unprepared for retirement.
With Congress divided between the Republicans and Democrats, little legislative activity is expected in 2012. Instead, most Washington observers believe everything done this year to promote retirement savings is merely practice for 2013.
After the November presidential election, Congress is expected to engage in comprehensive tax reform, in which the debate on retirement savings will feature prominently. Efforts to expand retirement coverage are mostly on hold, with most activity directed at holding on to that which currently exists.
Throughout 2012, it is expected that any action taken on retirement savings will occur via government agencies. For example, the Department of Labor is contemplating a number of regulatory actions that will impact retirement plans. Among the options being considered are proposals to enable the conversion of at least part of 401(k) or other employer-sponsored defined-contribution plans into an annuity. This is modeled after programs in the United Kingdom, Chile and several other nations.
Financial advice might become more costly
Also under consideration is a proposal to impose new fiduciary duties upon investment advisers and sellers of retirement products. This has met significant opposition from the financial services industry and many members of Congress because, if adopted, it would impose new costs that might make it difficult for them to continue to provide services for smaller accounts.
Most Americans have resigned themselves to the fact that the traditional defined benefit plan, which offered lifetime income, has gone the way of the horse and wagon in the private sector. It is also likely to take the same path in the public sector as state and local governments are increasingly burdened with huge retirement costs.
Deep down there is recognition that expanding the number of people saving and increasing the amount of dollars that they have in private accounts is essential to solving the retirement challenge. However, the conundrum faced by policy-makers is how to provide incentives for this to occur, when the government itself is running short of money and facing taxpayers who argue that they cannot afford to pay more than they already are into the tax system.