The commission will also examine the impact of federal policies on private savings, the finances and operation of Social Security Disability Insurance, the interaction of Social Security with personal savings, the impact of long-term care needs on retirement security, and the role of homeownership and student debt.
The reasons for shortfalls in retirement savings are complicated, but three stand out, says the BPC:
A sea change in workplace retirement plans
Over the past two decades, the workplace retirement landscape has dramatically shifted to defined contribution plans, in which a worker and in some cases the employer contribute to an account managed by the employee. These have largely replaced defined benefit plans, which specify a benefit – often a percentage of the average salary during the last few years of employment – once the worker retires.
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Since 1998, the number of companies offering any sort of defined benefit plan plummeted from 71 to 30 – and an increasing number of those are hybrid plans, where workers accumulate an account balance rather than an annuity. When 401(k)s were created in 1978, they were meant to be a supplement to traditional defined benefit pensions, not a stand-alone retirement account. But over time, they have evolved to serve that purpose – although they typically provide far less in long-term benefits than the old plans.
Dismal personal savings
The reasons for the long decline in personal savings are difficult to pinpoint, but they likely include stagnant real incomes for many workers, rising standards of living and higher consumption, and a weaker dollar than in the past. The savings rate is the percentage of money that one deducts from his or her personal disposable income for retirement.
America's savings rate fell steadily from the early 1980s through the mid-2000s, ticking up only during or after recessions, according to a Washington Post analysis. It topped 11 percent during President Ronald Reagan's first term. From 2005-2007, the annual rate averaged 3 percent. The savings rate essentially doubled during the Great Recession, and stayed there, averaging nearly 6 percent from 2009-2012. By early 2013, the rate had dipped to 2.6 percent, before rising again to 4 percent by mid-2014.
A Capital One ShareBuilder survey this year found that 72 percent of Americans are saving – while many more than that know they should be – and only one-fifth of them are saving 10 percent or more. On average, people are saving only 6.4 percent of their annual income, the survey found.
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Taking the money out
For those with defined contribution retirement accounts, carefully managing withdrawals is part of the challenge. Many people are shocked to discover that their account balances, when they need them, are smaller than they anticipated because of cash-outs during job changes, hardship withdrawals, or expensive 401(k) loans. Moreover, those who do not use their savings to purchase lifetime annuities face the risk of outliving their savings.
Individuals without long-term care insurance face impoverishment, having to spend almost all of their financial assets and income on care before they can qualify for long-term support benefits through Medicaid, the federal-state safety net program.
—By Eric Pianin, The Fiscal Times