Retirees, the Sky Is Not Falling

Years ago, I spent a long weekend in Florida at a hotel with a dandy beach bar that seemed to be patronized almost exclusively by retired guys from Michigan. I didn't know their real stories, but from their relaxed demeanor, I imagined that they all had fat pensions and years of leisure spread before them like sand leading to the ocean. Ever since, that scene has represented to me the good old days of retirement, when pensions prevailed and post-work life was a beach—as opposed to today, when we must scrape together our own retirement resources.

But maybe I've got it all wrong. "The Success of the U.S. Retirement System," a recent report by the Investment Company Institute, makes the case that the good old days of retirement are overrated and that current retirees, so far, are doing just fine. Today's retirees have more than two and a half times the retirement assets (inflation adjusted) of retirees some 30 years ago, according to the report.

That doesn't even account for Social Security, which has evolved from a limited program at its inception to an economic linchpin for virtually all retirees. The program replaces 36% of average career earnings for high earners and 58% for low earners—twice as much for both high and low earners as when the system began.

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And it has broadened coverage to include more people, such as spouses, dependent children and people with disabilities. Meanwhile, many more women have earned Social Security benefits based on their own work history—boosting retirement income for themselves and, if they are married, for their household.

That imagined golden age of pensions? Only 39% of private-sector workers were covered in 1980, and few of those workers stayed at one job long enough to accumulate substantial benefits. "The formula rewards people who have a long stint at one company and are close to retirement, which is not the typical employee," says Peter Brady, one of the authors of the ICI report.

That said, workers did pick up a few pensions (often small ones) after 1986, when legislation required employers to shorten the vesting period for private-sector plans. Before that (in the good old days), many employees had to clock ten years before being assured of a dime. Those pensions are still a key component of retirement income for baby-boomers, whose careers spanned the transition from pensions to 401(k)s.

Prognosis: mixed. "We're in the golden age of retirement right now, but that could fade," says Richard Johnson, director of the Program on Retirement Policy at the Urban Institute. Rising health-care and long-term-care costs threaten to inflict real damage on retirement income. Low interest rates will mean less income from money invested in annuities, the do-it-yourself pensions offered by insurers. As for savings, the Employee Benefit Research Institute projects that about 43% of boomers born between 1948 and 1964 and Gen Xers (born between 1965 and 1974) are at risk of not having enough to cover basic retirement expenses and uninsured health costs.

Despite all that, says Johnson, "the sky is not falling." Among the bright spots: As employers automatically enroll workers in 401(k)s, retirement saving has improved. The population has become healthier and better educated, allowing more people to work longer, if they are willing (and in most occupations, employers can't force them to retire). "Working longer is the best way to bolster your retirement security," says Johnson.

In any event, we live in the times we live in, not some glorious, mythical past or scary future. Sure, we need to save more, set goals and tackle systemic problems. But if we don't end up hanging out at the beach bar, at least with luck we'll stay productive and engaged a little longer. I'll take that outcome any day.

Jane Bennett Clark is a senior editor at Kiplinger's Personal Finance.

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