With corporate contributions to 401(k) plans diminished to about 1 percent of payroll, an unforeseen problem has incubated over the past 30 years. Now faced with inadequate savings, rising health care costs and a decade of poor stock market returns, baby boomers are delaying retirement. The current situation will ultimately drive up payroll and benefit costs and curtail productivity unless private sector employers change course and get involved.
“Employers need to realize they can’t get out of the pension business; they’re in it whether they like it or not,” says Lee Morgan, consulting actuary with the Retirement Consulting Practice at Towers Watson. “They must take steps to help aging employees retire with dignity or suffer the financial consequences.”
Smart Business spoke with Morgan about the situation facing baby boomers and how employers can influence the bottom line by helping veteran employees plan for retirement.
Why are baby boomers delaying retirement?
The problem is that 401(k) plans were designed to augment — not replace — traditional retirement plans, and now a perfect storm of events has created financial conditions that the average employee just can’t navigate. And at some point, the Keynesian-style government spending that is propping up the economy and retiree savings, as well, has to end. This will cause aging workers to stay on the job even longer. Consider these facts:
- A 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout retirement, according to Fidelity Investments.
- Two-thirds of people aged 65 and over will need some level of long-term care in their lifetime, which runs around $75,000 to $80,000 per year. For couples aged 65, there’s a 50 percent chance that one will live beyond 92.
- The average net worth for those in their 60s in the U.S. is under $200,000. Our savings rate pales in comparison to Japan, where citizens had traditionally saved up to 20 percent of their income, or China, where the traditional savings rate averages around 40 percent. Even though current Japanese savings rates have dropped considerably due to the financial crisis, U.S. savings rates have historically been far below those of most industrialized countries. At this point, it is clear most U.S. employees are ill equipped for anything close to the traditional retirement lifestyle they may have envisioned.
Why should employers get involved?
In their quest to reduce costs, employers relinquished control over the timing and pace of employee retirements. Our statistics show that at least 3 percent to 5 percent of the current work force is unproductive and not engaged, yet firing underperforming veteran workers can be problematic. Age bias charges filed with the EEOC during 2009 were the second highest on record as monetary relief for victims totaled more than $376 million. To make matters worse, a reduction in boomer spending is partially responsible for the current economic malaise, as only those covered by traditional pension plans will feel free to spend their paychecks. In fact, consumer spending had reached more than 70 percent of GDP before the financial crisis, which is very high by historical standards, in part caused by Keynesian-style government spending and home equity lines of credit, which have dried up. As people live longer, only countries with financially secure retirees will be able to sustain economic growth.
In brief, it seems likely employers will either have ‘retirees’ on the payroll (not able to retire) or receiving a traditional pension. Those ‘retired on the payroll’ will have implications for productivity and ability to retain younger employees.
