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FSI OneVoice 2011: Center for Retirement Research’s Munnell on Baby Boomers' State of Mind

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Alicia Munnell, director of the Center for Retirement Research at Boston College, addressed attendees at the midday keynote of FSI’s OneVoice 2011 conference in Phoenix Tuesday. Her message—the preparedness (or lack thereof) of baby boomers for retirement—was not new to her audience, but the statistics she provided and the tone of her presentation provided clarity for the challenges faced by the boomer generation.

“My mission today is two-fold,” Munnell (left) said. “I’m here to discuss the outlook for boomers in retirement and to advertise and advocate for the use of the financial planning tools we’ve made available.”

Retirement needs are increasing, she explained. The reasons are many; people are living longer and life expectancy is rising. At the same time, they continue to retire earlier. The retirement age in 2010 is still far lower than in 1970, even with all that boomers have recently gone through. Health care costs also continue their stratospheric rise, she said, and two-thirds of the population will need some sort of long term care.

“So as these needs are increasing, the retirement system is contracting, specifically when it comes to the traditional three-legged stool, which includes Social Security, investing and personal savings,” Munnell noted.

She argued that the first leg, Social Security, will replace less and less income moving forward, regardless of current laws. Also, the Social Security tax threshold is not indexed to inflation or wage increases, which will negatively affect more people as they reach said threshold.

The second leg, investments, contains a surprising fact, she says; less than half of employees work for companies that offer a defined benefit or a defined contribution plan. Of those that work for companies that offer plans, fully 20% of employees do not participate, and fully 90% do not contribute the maximum amount.

“People are traditionally bad at allocation, with far too much invested in company stock,” she stressed. “And young people, especially, tend to cash out rather than rollover their contributions when the change jobs. So even before the recession, 401(k) balances were far too small.”

The third leg, the personal savings rate, was actually negative for an extended period of time, especially after the year 2000. Christmas clubs and other tools that encouraged saving in a “we’re in this together” manner fell by the wayside.

Within this environment, she continued, boomers were struck by an economic crisis. The stock market dropped by 49% and the unemployment rate more than doubled. As a result, boomers flooded the job market. While younger people dropped out of the job market, older workers saw work as a way to compensate for lost assets. But fewer jobs meant high unemployment in the demographic.

As a result, many claimed Social Security benefits early. A downward trend in claiming Social Security benefits was reversed. This caused actuarial issues, and they were then forced to receive less in benefits for the rest of their lives. Whatever savings they had left was earning little due to the low interest rate environment from the Federal Reserve’s stimulus action, Munnell explained.   

“Out of all this, we developed the National Retirement Risk Index, which quantifies the magnitude of the retirement challenge by measuring key categories considered critical to retirement success,” she added. “In 2007, 44% of households were considered to be at risk. In 2009, that number had risen to 51%. That means half of U.S. households are at risk for outliving their assets in retirement.”

Explaining that she didn’t want her presentation to be “all doom and gloom,” she then turned to possible solutions to address the baby boomer situation.

“There are three levers baby boomer can adjust: they can control their spending; work longer or; make more effective use of their retirement assets,” she said.  “These levers, when adjusted properly, are incredibly powerful. Controlling their spending is actually more important to a successful retirement outcome than saving.  Working longer is the most powerful of the three because it means more Social Security, more 401(k) assets and an increase in the ratio of working to retirement years. The problem is high unemployment and negative biases on the part of certain employers towards older workers. When talking about the effective use of retirement assets, few people consider the house in the equation. Their house is a valuable asset and a potential source of retirement income through reverse mortgages and other techniques.”

Although these are powerful levers, she stressed that moving boomers to action requires making clear that their choices are constrained.

“We must quantify for boomers how powerful these levers are,” she concluded. “Lecturing them won’t work. Only by telling them that ‘doing nothing is not an option’ will we actually motivate them to do something. Presenting the reality of their situation will usually motivate them to act.”