Silver Tsunami

 Many posts have discussed demographic trends, especially the decline of births and the aging of the population.

Emily Peck at Axios:

A silver tsunami is washing across our shores, as record numbers of Americans start hitting retirement age. The U.S. isn't ready.

...
About 45% of Americans will experience retirement-funding shortfalls if they retire at 65, according to Morningstar's projections from last year.
...

.Out-of-pocket medical expenses are escalating, the cost of in-home care is growing more than three times faster than inflation, and an increasing share of the elderly are spending more than a third of their income on real estate too.

...

Only about 14% of Generation X (those ages 45-60) have a pension plan, according to the National Institute on Retirement Security.

...

.On paper, retirement accounts might make older Americans appear wealthy. There are an increasing number of 401(k) millionaires, after all.

But with costs and debts rising — and lifespans lengthening — older Americans might run out of money, she says, or be forced to severely cut back spending. "We have shades of the retirement crisis right now."

Between the lines: There's massive inequality when it comes to retirement readiness — workers earning more than $150,000 a year contribute nearly 13 times more toward retirement than those earning under $50,000, a report out in November found.

...
...
About 56 million Americans age 65 and older receive Social Security benefits, per federal data.

The lowest-earning workers rely on it. Social Security is the primary source of income for retirees with household incomes below $50,000, according to Transamerica's 2025 retirement survey.

A cut of 20% to 25% in Social Security benefits would have a devastating impact on retirees who rely heavily or solely on those payments," said Kristi Martin Rodriguez, who leads the Nationwide Retirement Institute. "61% of current recipients say missing even half of a payment would leave them unable to survive financially."

Retirement

Stef Kight at Axios reports that the 65+ number in the workforce has tripled in the past thirty years.

Why it matters: Delayed retirement is a sign of health and affluence for some and a continued life of hardship for others. As society ages and people live longer, a 21st century idea of retirement is needed, Steve Vernon of the Stanford Center on Longevity tells Axios.

The big picture: Americans are working longer — out of choice or necessity. And the trend has broad implications for people of all ages, from younger workers mapping out their futures to older people planning their legacies.

• 43% of Americans ages 45 years and older say they expect to outlive their savings, according to an Axios/SurveyMonkey poll.
• 31% of Americans ages 40-79 said they would continue working into retirement age even without a financial need, according to a recent Harris Poll for TD Ameritrade.

"[T]here is more and more incentive to work longer, because the more you work the more you're going to contribute to the [retirement] plan and the more you're going to get from the plan," Richard Johnson, Urban Institute's director for the Program on Retirement Policy, tells Axios.

The state of play:

• On one hand, the average retirement age is just 63 years old.
• Poverty rates among the 65 and older group have fallen.
• Since the 1980s, Social Security benefits have risen along with wages, Vernon said.

The other side:

• Pensions largely don't exist anymore, replaced by 401(k) style retirement plans.
• But many small and mid-sized employers don't offer retirement plans, according to the Bureau of Labor Statistics.
• Boomers today also have more debt than past generations — an average of $120,000 for those in debt, per the Stanford Center for Longevity.
• 30% of them had nothing saved in a retirement plan in 2014.
• There's a growing number of elderly Americans reliant on Medicare and Medicaid.

Reality check: The mechanisms that once ensured an easy retirement may be disappearing, but a small percentage of American workers ever really benefited from pension plans.

This image that we have that the prior generation of workers had generous pensions, is largely not right," Vernon said.

Pensions

Lydia DePillis reports at CNN Business:

Traditional pensions are disappearing in America, and the federal government just made it easier for employers to get rid of them.

With no fanfare in early March, the Treasury Department issued a notice that allows employers to buy out current retirees from their pensions with a one-time lump sum payment. The decision reverses Obama-era guidance, issued in 2015, that had effectively banned the practice after officials determined that lump-sum payments often shortchanged seniors.

Now, advocates for the elderly worry that millions of people receiving monthly pension checks could be at risk.

"Permitting plans — for their own financial benefit — to replace joint and survivor or other annuities with lump-sum payments will reduce the retirement security of both workers and their spouses," AARP Legislative Counsel David Certner said. 

Since the 1980s, employers have shifted away from offering defined-benefit pensions, which provide a guaranteed monthly income for as long as someone lives in retirement. Instead,employers now favor 401(k) accounts, a finite pot of money that becomes available at age 59.5.

Pensions, which are insured by the federal Pension Benefit Guaranty Corporation in case employers go bankrupt, still cover 26.2 million people across 23,400 single-employer plans. But that number has been shrinking faster than it would naturally as companies close their plans to new hires.

The Seniors Are All Right

At The New York Times, Dionne Searcey and Robert Gebeloff find that seniors are doing okay, thanks to Social Security, traditional pensions, and higher labor force participation, among other things.

People on the leading edge of the baby boom and those born during World War II — the 25 million Americans now between the ages of 65 and 74 — have emerged as particularly well positioned in the nation’s economic timeline. While there are plenty of individual exceptions, as a group they are better off financially than past generations and may well enjoy a more successful old age than future ones, even those merely a decade younger.

...
In the past, the elderly were usually poorer than other age groups. Now, they are the last generation to widely enjoy a traditional pension, and are prime beneficiaries of a government safety net targeted at older Americans. They also have profited from the long rise in real estate prices that preceded the recession. As a result, more seniors now fall into the middle class — defined in this case between the 40th and 80th income percentile — than ever before.

Median income for people 75 years and older has also risen, but not as much as it has for people in the 65-to-74 age group.
...
Some researchers have found that the economic success of seniors is masking an even deeper gulf in income inequality between the upper tier and everyone else than what is evident in the overall statistics.

“It’s not so much that older people are experiencing unseemly gains in income,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “It’s more that middle-aged people are not seeing income growing or even keeping pace with inflation.”

Nearly half of seniors ages 65 and up consider themselves in excellent or good shape financially, according to a Pew survey last month, in contrast to younger baby boomers, who view their circumstances less favorably.
...
As recently as the late 1990s, only one in five Americans in their late 60s had a job. Now, that number has jumped to almost one in three. And unlike in their parents’ generation, more women are earning paychecks than in the past, contributing to household income.
...
The median assets of people ages 65 to 74 doubled between 1989 and 2013, a far greater gain than other age groups experienced. And while there has been a decline from the peak since 2007, largely because of the real estate bust, this age group lost less than others.

Government Crowded Out

CUNY professor Daniel DiSalvo has written a Manhattan Institute report titled "Government Crowded Out." The executive summary:

Throughout the United States, state and local governments face skyrocketing costs for the pensions and health care of their current and retired teachers, firefighters, police, and other employees. Many of these costs are effectively on "autopilot": They are locked in place by law or by union contract, and lawmakers neither control nor review them. In Washington State, for example, 55-60 percent of the budget goes to pay the salaries and benefits of the state's employees, so more than half of the state budget is off limits to policymakers.

As more and more of a government budget is devoted to employee pensions and health care, lawmakers must (a) raise taxes, or (b) engage in dangerous fiscal gimmickry, or (c) take on more debt, or (d) or spend less on schools, roads, public transport, libraries, assistance for the poor, and other functions. Troublingly, many governments are choosing option (d), creating the paradox of government that spends more and more to do less and less.

In this paper, we detail how spending on public-employee pensions and health care is crowding out essential government services in states, cities, and other local-government jurisdictions.
Because of local governments' pension and health-care commitments, we report:

• The cost to local government of employing a worker has soared. For instance, in San Jose the average cost of a full-time worker is $142,000 a year, up 85 percent in ten years. A sanitation worker in New York City now costs $144,000 annually, up from $79,000 a decade ago.
• Governments are spending a rapidly growing percentage of precious revenue on pensions alone. For example, in 2013, according to New York City mayor Michael Bloomberg, "every penny in personal income tax we collect will go to cover our pension bill." Since 2005, the city's spending on pensions rose from 6.1 percent of the budget to 11.7 percent. In Los Angeles, pension costs were 3 percent of the budget only 10 years ago. Today, they are 18 percent.
• The most common response to rising pension and health-care costs is to cut services. Chicago, for example, is in the process of closing 11 percent of its schools. In Des Moines, Iowa, the library is now closed one day a week, trash in the parks is picked up less often and streets are cleaned less frequently, due to a rise in police and fire pension costs of 20 percent. Despite these cuts, Des Moines has instituted a property tax increase.
• Pensions are not the only concern. Most local governments lack any long-term strategy for funding their health-care commitments to employees. As of 2009, the 61 American cities with a population greater than 500,000 collectively had $118 billion in liabilities for employee and retiree health care, and had only set aside enough money to cover 6 percent of this. Meanwhile, U.S. states' health care liabilities increased by $22 billion (4 percent) in just one year (2009—10).

Federal Benefits

Almost half of Americans receive some kind of federal benefit.  Just over a third live in a household receiving help from at least one means-tested program.

The US Census Survey of Income and Program Participation reports on people by receipt of benefits from selected programs: monthly averages, April, May, June, 2011. 

The figures for means-tested programs include anyone residing in a household in which one or more people received benefits from the program.

Percent            All people 100.0     Received benefits from one or more programs 49.0    Social Security 16.2    Railroad Retirement 0.1    Veterans' compensation 1.0    Unemployment compensation 1.7    Workers' compensation 0.2    Veterans' educational assistance  --    Medicare 14.9    One or more means-tested programs  35.1       Public or subsidized rental housing 4.5       Federal Supplemental Security Income (SSI) 6.5       Food stamps  15.8       Temporary Assistance for Needy Families (TANF) 2.0       Other cash assistance 1.8       Women, Infants, and Children (WIC) 7.5       Medicaid 26.4

The Fiscal Crisis of the States

In June 2011 former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Chairman Paul A. Volcker assembled a State Budget Crisis Task Force to examine fiscal threats to California, Illinois, New Jersey, New York, Texas, and Virginia. Among the findings:

Certain large expenditures are growing at rates that exceed reasonable expectations for revenues:

• Medicaid programs are growing rapidly because of increasing enrollments, escalating health care costs and difficulty in implementing cost reduction proposals. At recent rates of growth, state Medicaid costs will outstrip revenue growth by a wide margin, and the gap will continue to expand.• Pension funds for state and local government workers are underfunded by approximately a trillion dollars according to their actuaries and by as much as $3 trillion or more if more conservative investment assumptions are used.• Unfunded liabilities for health care benefits for state and local government retirees amount to more than $1 trillion.

The capacity to raise revenues is increasingly impaired:

• Untaxed transactions are eroding the sales tax base. Gasoline taxes are eroding as well, making it more difficult for states to finance roads, highways, and bridges.
• Income taxes have become increasingly volatile, particularly during and after the recent economic crisis.

The federal budget crisis will have serious spillover effects on state and local governments, and state actions will have spillover effects on local governments: 

• Cuts in federal grant dollars, lower spending on federal installations, procurement, and infrastructure, and potential changes to the federal tax code all threaten states’ fiscal stability.
• Pressures on local governments, caused by the weak economy and cuts in state aid, are constraining education spending, law enforcement, aid to the needy, and the institutions that make up the culture of our cities. Local government cuts pose a significant risk to the overall economic and social fabric of states.

Unions, Pensions, and Politics

Our chapter on interest groups notes the changing character of organized labor. Union members are now more likely to be white collar than blue collar, public sector than private sector. The New York Times reports:

Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules.

It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.

And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

Robert Holland and Don Soifer write in The Oklahoman:

Currently in the United States, state and local government employees’ pension and retiree health-benefit plans are under water to the tune of some $3.6 trillion, according to researchers at the Kellogg School of Management.

With government workers now comprising more than half of labor union membership in the United States, the priorities of current union leadership may be more at odds with those of average working Americans than at any time previously.

For the most part, public-sector workers enjoy more paid leave and vacation time, more job security, better benefits for which they pay less, and in many cases higher salaries than private sector employees.

Historically, the mission of public-employee unions has been to preserve and augment the benefits of teachers, police officers, firefighters, and others in their ranks who serve the public. However, the budgetary crisis that is nudging many state and local governments closer to bankruptcy is making many union rallying cries ring more hollow by the day.

The Hill reports:

The country's public pension system is grossly underfunded and needs an overhaul, Rep. Devin Nunes said this week.

The California Republican is promoting legislation designed to gauge the extent of the problem, while also establishing a ban on federal bailouts of public pension programs.

"Part of the problem that we have today … is we don't know what the truly unfunded liabilities are," Nunes told Fox News on Friday. "We need to know exactly what the number is. We can't make decisions at any level of government if we don't know what the true undisclosed benefit is or liability is for these benefits."

Nunes' comments came on the same day that the Pittsburgh City Council passed an emergency funding bill designed to prevent the state of Pennsylvania from taking over the city's underfunded pension system.

That episode, Nunes said, "proves a point that everyone in America needs to know what is it exactly that we owe our public employees."

Bureaucracy and Benefits

At The Weekly Standard, Fred Barnes writes:

According to the U.S. Bureau of Labor Statistics, state and local government salaries are 34 percent higher than those for private sector jobs. Okay, that’s partly because government workers tend to have white-collar jobs. Benefits, 70 percent higher for these workers, are the real rub. And benefits for government retirees are the most flagrant. They’ve become a national scandal, a fiscal nightmare for states, cities, and towns, and an example of unfairness of the sort liberals routinely complain about but are mostly silent about just now.

The American Federation of State, County, and Municipal Employees has a different take:

However, most public plans require member contributions, and almost all public plans invest their assets and earn additional income. According to the U.S. Census Bureau, state and local pension plans ­accumulated $2.3 trillion in investment earnings from 1982 through 2005, compared with total employer (taxpayer) contributions of $885 billion and employee contributions of $435 billion. Consequently, taxpayers paid 24% of the total amount paid into public plans during this period, with the remaining 76% coming from investment earnings and employee contributions. Every dollar taxpayers paid into public plans generated an additional three dollars, to be returned to the economy as retirement income.