1.4: Financial Security

Financial Security for an Aging Population

Other Information:

Providing retirement income security in the United States has traditionally been a shared responsibility of government, employers, and individual workers. However, the financing shortfall facing Social Security and Medicare, which could result in benefit reductions, and the declining security of employerprovided pension plans suggest a shift in responsibility and risk to individual workers for ensuring an adequate and secure retirement. These trends are the outgrowth of broader developments associated with population aging, global competition, and labor market trends and are unlikely to abate in the near future. With the babyboom generation beginning to retire, the Congress (1) will need more information on the economic, financial, and social implications of these trends to ensure that government, employers, and workers share retirement risk equitably and efficiently and (2) will need to ensure that the Social Security Administration is efficiently managing the influx of new baby-boom retirees. Such information will also help workers make informed retirement planning decisions, including on when and how to retire and invest their savings. Moreover, these decisions may be driven in part by the interaction between federal programs, including any changes to retirement age, health insurance coverage, and disability benefits. Sustainability of retirement programs: Since 1960, life expectancy at age 65 has increased by over 3 years. By 2050, persons age 65 or over will account for over 20 percent of the total U.S. population, up from about 13 percent in 2000. If retirement ages do not adjust to these changes, people are expected to spend more time in retirement. This will adversely affect the sustainability of pay-as-you-go-financed federal retirement programs. Although the Social Security trust funds are not expected to be depleted until 2037, the strains on government finances will begin as early as 2016, when Social Security starts to pay out more than it takes in each year.29 Given current benefit and revenue streams, Social Security programs will face shortfalls over the long run, and the federal government is going to have to make hard choices regarding either benefits or revenues or both, to stabilize the programs. To the extent such choices reduce benefits, they will affect the level of financial resources workers can draw on during retirement. Furthermore, the expected increase in the average amount of individual health care expenses—from 17 percent of the average Social Security benefit in 2010 to 37 percent in 2080—may further reduce these resources. Employer-provided pensions: Although many Americans will rely on employer-provided pensions for an important part of their retirement income, this source of income is also facing challenges: Because providing pensions is voluntary, „„not all employers offer a pension and, among those that do, not all employees choose to participate. At any given time, only about half of the private-sector workforce has a pension. The number of defined benefit pension „„plans (see fig. 25) has declined dramatically as has the percentage of the private labor force covered by these plans. When a defined benefit pension plan is in financial distress, the Pension Benefit Guaranty Corporation (PBGC), which insures the defined benefit pensions of 44 million participants, protects a portion of the retirement income of workers by providing a guaranteed maximum benefit. GAO placed PBGC’s programs on its High-Risk List because of concern about the program’s long-term net financial position. PBGC’s structural financial shortfall has worsened because of unfavorable economic conditions and the instability of pension plans PBGC insures, particularly those of major employers in the manufacturing and transportation sectors. At the end of fiscal year 2009, PBGC’s programs registered a negative net accumulated position of $21.9 billion, an increase in the deficit of $10.8 billion over the prior year. Meanwhile, employers are increasingly „„moving away from traditional defined benefit plans to what has become the most dominant and fastest growing type of defined contribution plans, 401(k) plans; 401(k) plans allow workers to save for retirement by diverting a portion of their pretax income into an investment account that can grow tax-free until withdrawn in retirement. As participants accrue earnings on their investments, they also pay a number of fees, including expenses, commissions, or other charges associated with a 401(k) plan. Since workers now largely bear the risk of investment under 401(k) plans, any factor or decision that negatively affects participants’ retirement savings income, such as adverse fees or hardship withdrawals, can have potentially irreversible consequences for the participant’s retirement income and could result in workers having to extend their work life or rely more heavily on personal savings. Personal savings: Despite the outlook for federal retirement programs and employer-sponsored pension plans, individuals have so far not filled in the gap with personal saving, and the economic downturn has depleted the savings of many individuals. In 2007, only 40 percent of families headed by someone ages 55 to 64 owned an Individual Retirement Account, and among families in this cohort in 2009, median account balances were $52,000.30 In recent years, personal saving as a percentage of disposable income has been very low. In 2005, for example, personal saving averaged just 1.4 percent of disposable income. The economic downturn has caused people to decrease spending, which has likely increased saving: The personal saving rate rose to 4.3 percent by 2009. (See fig. 26.) Whether this trend will continue remains to be seen. Delaying retirement: In response to these challenges and changing economic conditions, many workers may need to stay in the labor market past today’s typical retirement age, which is about age 62 for both men and women. This trend may already be under way and may have strengthened during the economic downturn. For example, the highest participation rate increases between 2008 and 2018 are projected to be 7.5 percent for workers ages 62 to 64, and 6.2 percent for workers ages 65 to 69. Many employers indicate a willingness to recruit or retain older workers, and some programmatic changes, such as the Social Security earnings test for those people above the normal retirement age, have been updated to eliminate penalties for continued work. But most employers have not made the types of changes—such as establishing alternative work and schedule arrangements or allowing phased retirement—that would accommodate the needs and preferences of older workers. The Congress and employers must address the labor market challenges posed by an aging population and encourage older workers to participate in the workforce. In the coming 3 to 5 years, GAO will examine policies aimed at ensuring financial security by stabilizing the Social Security program for the long run and enhancing retirement security through improvements to pension plan features. Improved financial literacy and greater awareness of retirement income needs can also help workers develop strategies to ensure income security in old age. To support these efforts, GAO has established the following performance goals and key efforts:

Stakeholder(s):

• Aging Population

Indicator(s):

Indicator:1

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