United States Falling Behind on Retirement SecurityTrevor Gerszt
A recently-published study has shown that the United States is falling behind a number of other developed countries when it comes to retirement security. The study focused on several factors that play into retirement security, all of which are showing negative trends. Throughout the developed world, retirement security is proving more elusive than ever, but the United States, in particular, is falling behind other advanced nations.
Government Plans Lead to Dependence
Although the United States is not the highest-ranking country in terms of public dependency, it still ranks 16th out of 43 countries. Japan, not surprisingly, is 43rd, as the country has a long history of high savings rates and has a population that doesn’t expect government handouts.
Americans have been conditioned over the years to believe that Social Security is a beneficial program. Social Security was instituted supposedly to protect those people who otherwise wouldn’t save for their own retirement, yet its creation has actually led to more people expecting the government to help them, and therefore failing to save for themselves.
As with any insurance-type program, the expectation that Social Security will be there as a backstop to help people in retirement has incentivized many people not to save and invest because they think the benefits they receive will be enough to live on in retirement. That is the moral hazard that exists with any type of insurance. Only this time the effects of that moral hazard will result in millions of retirees not having enough money to live on in old age.
American savings rates have been declining precipitously for years. While there were a few significant upticks during and immediately after the financial crisis, the personal savings rate in the United States is still less than half of its historical levels. And because the Social Security trust fund is expected to run out of money in 2034, with Social Security benefits only funding three-quarters of benefits thereafter, many retirees will face great financial difficulties if they aren’t prepared.
Living Longer Leads to Greater Liabilities
Another variable factoring into the lack of retirement security is the lengthening of lifespans. Improvements in health care, nutrition, and sanitation mean that it is no longer uncommon for retirees to live into their 90s. One in every four 65-year-olds today will live into their 90s. And while the overall life expectancy rate remains in the 70s, life expectancy rates for retirees continue to grow. In 1950, the average 65-year-old could expect to live another 13.9 years. Today the average 65-year-old can expect to live another 19.4 years, and the average 75-year-old can expect to live another 12.3 years. That increased life expectancy leads to extra costs, both for retirees and for those who are paying for their expenses in retirement.
For Social Security, that means that the actuarial calculations used when the system was first created the need to be recalculated, and need to take into account that lifespans will probably continue to increase in the future. But pension systems are suffering from the same difficulties too. While many private companies have eliminated their defined-benefit pension systems in favor of employer-contributed retirement plans, many public sector employees, in particular teachers, still are covered under pension plans.
Pension fund managers have large amounts of funds to invest and a pretty good track record of investing performance, but the current era of low-interest rates that has been forced upon investors by central banks has seriously affected the ability of pension plans to provide for employees. Many long-term investment decisions were based on the assumption that investments would receive an 8% return over the long term. Many pension funds have had to dial back those assumptions to 7%.
But because interest rates have been so low for the past several years, many investments haven’t even made those types of revised gains. Eight years of subpar gains mean that pension fund investments have to make up for it with larger gains in the future in order to get back to where they need to be in order to fund their long-term liabilities.
A pension fund that gains 2% per year for 8 years needs to gain 10.5% per year for the next 12 years to get to the same level of funding that a 7% average growth rate would get to over a 20-year period. If that low 2% growth rate lasts for 10 years, then the fund needs to grow at 12.2% over the next 10 years in order to get back on track. That would require incredible performance and very likely an expansion into investments that are far riskier than any pension fund manager would wish to invest in. Since both of those scenarios are unlikely to happen, we have to assume that many pension funds will be underfunded for years or decades to come, to the tune of trillions of dollars. And that means that many retirees will receive a rude wakeup call when they expect to start relying on their pensions.
Nothing Tops Individual Responsibility
The long and the short of retirement security is that employees will likely have to fund a significant portion of their retirements themselves. Taking a chance that either Social Security or a pension fund will be able to pay 100% of its expected benefits and that those benefits will be able to fully pay for expenses for retirement is like playing Russian roulette. The risk that you might find yourself facing retirement with insufficient funds to support yourself is just too great. And once you’re retired there’s no way to make up for all those lost decades of savings and investment.
That’s why it’s so important to set aside your own retirement savings. The “worst” thing that could happen is that you end up retiring with too much money. Wouldn’t that be a great problem to have? More likely, your individual retirement funds, such as an individual retirement account (IRA) or a 401(k) plan, will provide the bulk of your retirement savings, or at least a substantial and much-needed supplement to any benefits you expect to receive in retirement.
A well-diversified portfolio that hedges against financial risk will serve most retirees very well. That means that not only is your portfolio focused on building wealth while you’re working, but it also takes steps to protect that wealth as you get closer to retirement.
Millions of investors both large and small choose to protect their wealth by investing in precious metals. Precious metals such as gold and silver act as hedges against inflation and financial risk. Portfolios that are invested solely in stocks, bonds, mutual funds, or other financial instruments are completely exposed in the event of a market meltdown. Gold and silver act as safe havens during times of financial crisis, however, maintaining or increasing their value and protecting your hard-earned assets.
Since the gold window was closed in 1971, gold has enjoyed average annual returns of over 7.5%, in line with pension fund projections and making it a solid investment choice for long-term asset protection. And with the development of precious metals IRAs such as a gold or silver IRA, investing in precious metals is easier than ever. A gold IRA allows you the ability to invest in gold with your existing retirement funds through a transfer or rollover, while still giving you the same tax advantages of a traditional IRA. Don’t wait until you realize that your expected benefits are too little before you begin to save – get started today.