One of the greatest services that retirement planners can do for their clients is to advise them to delay receiving Social Security benefits until beyond age 62, according to recent testimony before the Congressional Special Committee on Aging.
Addressing what it calls a “retirement crisis,” the Special Committee on Aging met recently to hear testimony on the “State of the American Senior: The Changing Landscape for Baby Boomers.” The meeting was led by Chairman Bill Nelson (D-FL) and Ranking Member Susan Collins (R-ME).
The special hearing was called to discuss the current plight of the Baby Boomer generation as it reaches retirement age. For the first time since the Great Depression, a majority of Americans are said to be approaching retirement less financially secure than their parents.
Making matters worse, the average retiree today carries more debt heading into retirement than a generation ago. And they lack pension benefits or retirement savings to afford a comfortable living in retirement.
“Far too many American seniors struggle to get by and have real reason to fear they will outlive their savings,” Senator Collins said. “Nationally, one in four retired Americans have no source of income beyond Social Security—in Maine, that number is one in three—and four in 10 rely on that vital program for 90 percent of their retirement income. Bear in mind that Social Security provides an average benefit of just $1,230 per month. It is hard to imagine stretching those dollars far enough to pay the bills,” she said.
That message was reinforced by testimony by one of the speakers at the hearing. Sixty-three year-old Venice, FL resident Joanne Jacobsen said she had always assumed her promised pension and health benefits would be sufficient for her in retirement. But then her benefits were all but eliminated by her long-term employer.
Jacobsen told the hearing that faced with little money and no health insurance; she was forced to go back to work to make ends meet.
Her story is far too common, Collins said, as a majority of Baby Boomers are ill-prepared to financially survive in retirement. There are several factors at work, from changes in pension plans, to changes in healthcare reimbursements, to impacts on personal savings and home values from the recent Great Recession, as it is being known.
Gone are the days when greying Americans could cling to the belief that they would be well-cared for in retirement.
“We Boomer face a much different future,” Olivia S. Mitchell told the hearing participants. Mitchell is a business professor at the Wharton School and executive director of Wharton’s Pension Research Council. “We worry that Social Security and Medicare, as well as the disability insurance system, is fragile. Few of us have retiree medical coverage and traditional defined benefit pensions.
“Some of us with defined contribution pensions have not saved enough, nor are we converting our assets into longevity-protected income streams so as to avoid outliving our saving,” Mitchell said. “Interest rates are so low that holding TIPS is a losing proposition. With longer lifespans in the offing, we very much need protection for long-term care costs, but the products aren’t widely available or affordable. And many more Boomers are in debt than we have seen in generations.”
Mitchell provided considerable detail on why retirees carry more debt today, what the sources of the debt are, and the impact it has on the broader economy. She also stressed the need for more education to help consumers navigate these turbulent waters.
“Boomers could also do better with more access to financial advice, which can generate potentially important rewards in the form of lower debt for those nearing retirement,” Mitchell said. “They also need more information on the benefits of delaying retirement; indeed, many have come to this conclusion on their own.”
Most importantly, “deferring Social Security claiming produces a much higher retirement income for many: for instance, delaying claiming benefits from age 62 to 70 can mean an additional 76% more in monthly payments,” Mitchell said.
Next to Social Security, the other key area for retirement assets of course are benefit pension plans. But 401(k) plans have fallen short of providing the same value as the retirement plans of a generation ago, according to Richard W. Johnson, director of the Program on Retirement Policy at The Urban Institute.
Johnson told hearing participants that 401(k) plans generate substantial retirement income only if the individual makes significant contributions to the plan each pay period, invests wisely, and doesn’t touch funds in the account before retirement. Based on current figures, Johnson said the average individual with a 401(k) plan can expect to receive only $500 per month in retirement.
To help seniors be better prepared for retirement, Johnson urged Congress to consider four policy actions:
- Safeguarding incomes for the most vulnerable seniors, meaning those with limited incomes and resources.
- Protecting seniors from high out-of-pocket health and long-term care costs, including the creation of a program to help families finance long-term care.
- Encouraging lifetime income, by considering reforms that make annuities more attractive and would increase public confidence in them.
- Promoting work at older ages, including the encouragement of flexible work schedules by employers, and possibly even the raising of the federal retirement age to 70.
However, there are some encouraging changes in today’s working generation, according to Johnson. The most obvious is that more women are working and they are earning more than previous generations. That increases household income, and enables women to earn Social Security credits and 401(k) earnings on their own.
Americans are also healthier overall than prior generations, work longer careers, and have the opportunity to save more for retirement—if they do so wisely, Johnson said.