The head of one of America’s leading financial services companies kicked off his keynote address to state legislators Tuesday with two eye-opening statistics: More than half of American working couples have saved less than $25,000 for old age, and more than a quarter have saved less than $1,000.
In his talk, “America’s Retirement Crisis,” Ferguson told the 39th annual National Conference of State Legislatures' Legislative Summit that besides a lack of savings, three other factors are driving the crisis: an aging population, a shift from traditional pensions to the private sector, and unfunded liabilities in the public sector.
“Across all sectors, future retirees worry – with good reason – that they will be unable to count on Social Security, Medicare and Medicaid to the same degree that previous generations of retirees have,” said Ferguson.
Today’s lower lower birth rate, combined with longer life expectancies (an average of 81 years for women and 76 for men), means there are fewer young working people supporting retirees – “a recipe for big fiscal challenges everywhere.”
The ratio of workers paying taxes per Social Security beneficiary is projected to be 2.9 this year, down from 3.4 per beneficiary in 2000 – and 16.5 per beneficiary in 1950, he said.
“It’s clear the nation must take action sooner rather than later,” Ferguson said.
That action should include: 1) making sure Social Security remains healthy and viable for people with low earnings; 2) convincing middle-income earners to plan and save for retirement; and 3) convincing Americans to work more years and to delay retirement.
Finally, Ferguson said, the nation must concentrate on increasing financial literacy. A recent TIAA-CREF survey showed, for example, that nearly half of Americans don’t have a basic understanding of IRAs, one of the most important types of retirement savings instruments, he said.
In the past, employers largely managed their workers’ retirement funds, but today, it’s up to individuals themselves.
“Planning for retirement is a powerful predictor of wealth accumulation,” Ferguson said. “People who plan for retirement have more than double the wealth of people who do not plan.”
Americans with little financial knowledge tend to borrow more, have more problems with debt, buy fewer stocks and save less, he said. The problem is magnified among the poor, women and minorities. Women, for example, earn 77-81 cents for every dollar men earn, and they’re often out of the workforce 10 years or more to care for children or elderly parents.
“TIAA-CREF believes that one of the most pressing issues of the day is lifetime income - specifically, the need to make sure that our aging population can fund retirements that may stretch for 20, 30 or even 40 years.”
According to the Government Accountability Office, annuities – which guarantee the buyer some monthly income for as long as he or she lives – are good savings vehicles, Ferguson said. But he added that only 6 percent of workers in defined contribution plans bought an annuity upon retirement. Additionally, Ferguson says, many people are taking their Social Security benefits before they reach full retirement age, which means they’re leaving money on the table.
“Given the new realities around funding retirement, our nation desperately needs to rethink its retirement system to meet 21st century needs.”