Is Retiree Poverty Making a Comeback?

Increased aging longevity coupled with diminishing Social Security benefits are stewing together in what could be a return in poverty among retirees and the elderly—and it’s not just happening in the U.S., says a recent article from The New York Times.

On average, people are spending seven more years in retirement today than they did in 1970, according to the NY Times, which cites data from the Organization for Economic Co-operation and Development (OECD). As a result, this prolonged retirement span has strained the finances of public pension systems, including Social Security.

For an American worker in the “middle rung of the earnings ladder” whose career pay averaged $46,000 per year in today’s money, the NY Times notes this person could retire today at age 65 with a Social Security benefit worth 39% of the career average.

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“But unless something is done to replenish Social Security’s shrinking trust funds, by 2035 the first pension check for such a worker might amount to as little as 27.5 percent of her career wage,” writes the NY Times, citing calculations published last year by the chief actuary of the Social Security Administration.

This isn’t strictly an American trend, either. An analysis by the OECD indicates that the gross replacement rates of the public pension systems in several European countries are also likely to decline over the coming decades.

In 1950, there were 14 people aged 65 and older in OECD countries for every 100 people of working age, writes the NY Times. Today, there are 28, and that trend is expected to continue for the next 50 years.

Increasing longevity is already having a tangible effect public pension systems. Between 1990 and 2011, public spending on “old-age” pensions and survivors’ benefits in the OECD rose from 6.2% to 7.9% of overall economic output.

“Demographics, like ocean liners, move slowly and can be spotted from afar,” writes the NY Times. “On top of that, the lackluster growth and high unemployment experienced across much of the Western world in the last few years is going to make it much harder for young workers who expect to retire around midcentury from accumulating enough money to sustain a decent living standard in old age.”

This all raises the question: is old-age poverty going to pick up again?

Fortunately, public pensions are not retirees’ only source of income support. Although Social Security may be one leg in the proverbial three-legged retirement stool (supporting private pension and retirement savings), fewer than half of workers in the U.S. today are covered by a private pension.

Given this, along with countless reports and analyses that have reported Americans to be vastly unprepared with insufficient savings for retirement, some in the reverse mortgage industry have touted the Home Equity Conversion Mortgage as a viable retirement planning tool, thus transforming the three-legged stool into a four-legged chair.

The Government Accountability Office estimates that fewer than one in five retirees among the bottom 20% have a defined benefit pension that pays guaranteed monthly income. It also estimates that fewer than one in 10 retirees have any retirement savings.

“The challenge is particularly dire in the United States, despite a large young immigrant population, which reduces the demographic pressure: 21.5 percent of Americans 65 and older make less than half the nation’s median income, almost double the O.E.C.D. average,” writes the NY Times.

While modest increases in payroll taxes targeted on higher-income workers could prevent the depletion of Social Security’s funds, such a solution would seem “politically dead on arrival” in Washington under the tax-averse Republican controlled Congress. This also poses a challenge for most European countries, the article notes, where taxes are relatively high.

“The other alternative—which most industrialized countries see as the key to overcome their demographic stress—amounts to more work,” writes the NY Times. “While this is not an unreasonable proposition, it may not amount to the fix everyone is hoping for.”

Read The New York Times article.

Written by Jason Oliva

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