- The Government Accountability Office says Congress should create an independent commission to examine ways to improve the retirement system.
- Among the challenges are Social Security uncertainty, lack of universal access to retirement plans and economic roadblocks to increasing personal savings.
A new government report is sounding the alarm to Congress about a looming retirement crisis if nothing is done to fix existing roadblocks to financial security for many Americans.
The Government Accounting Office paper calls on lawmakers to create an independent commission to "comprehensively examine" the U.S. retirement system — including Social Security, workplace retirement plans and individual savings — and make recommendations for improvements.
The goals, the report said, should be to:
- Promote universal access to retirement savings
- Ensure greater retirement income adequacy
- Improve options for the spend-down phase of retirement
- Reduce both the complexity and risk for both retirement plan participants and sponsors
- Stabilize financial exposure to the federal government
"We recognize that some of these goals may compete with each other — in particular, ensuring greater retirement security and minimizing fiscal exposure to the federal government," the report said.
While many GAO reports are issued at the request of congressional members or committees, this study was conducted at the behest of the GAO's director, Comptroller General Gene Dodaro. The report said the nation's approach to financing retirement has not been evaluated by a federal commission in 40 years.
"He [Dodaro] believes that Congress and the public should be made aware of the serious retirement challenges facing the American people," said Charles Jeszeck, director of the GAO's education, workforce and income security team.
The GAO is in the process of briefing seven congressional committees whose jurisdiction covers areas addressed in the report. (Click on graphics to enlarge.)
The report lays out in detail the issues that could leave retirees in the lurch.
For starters, Social Security won't be able to pay all promised benefits beginning in 2035 if Congress does nothing before then to shore up the system.
At the same time, 34 percent of retirees in 2015 were receiving 90 percent or more of their income from their monthly benefits.
Additionally, workplace retirement plans face several challenges.
Private sector employers offered retirement savings plans to about 63 percent of working-age people in 1999. By 2016, that had only inched up to 66 percent, the report said.
In 2015, defined contribution plans such as 401(k)s, along with individual retirement accounts, held about $12.6 trillion in assets, compared with the $2.9 trillion in traditional pensions, which have been on the decline for the last few decades. This means individuals are in charge of making their own investment choices.
Also, the bulk of asset growth in IRAs is due to rollovers of funds from 401(k) accounts or pension lump-sum payouts — approximately 92 percent in 2014. This means many of those IRAs exist instead of a workplace plan, rather than supplementing it.
The report also points to economic and social changes that have made it increasingly difficult for Americans to save for retirement.
For instance, while the top 20 percent of households made strides in income levels between 1970 and 2015, the remaining 80 percent have faced wage stagnation. At the same time, however, one major expense in retirement —health care — has outpaced inflation.
The report notes that between 2002 and 2012, out-of-pocket medical spending by people age 65 or older grew by an average 2.9 percent yearly, compared with the average 2.4 percent yearly inflation.
Another roadblock to saving for retirement that has emerged as a bigger issue is household debt. The median per-household debt grew by 67 percent between 1989 and 2016 in the 35-to-44-year-old age group. For those age 45 to 54, that jump was 104 percent.
Longer life expectancies also could translate into trouble funding retirement for future retirees. A woman born in 2015, once reaching 65, can expect to live to age 88.7, compared with age 83.7 for a woman born in 1915. Likewise, a man born in 2015 who reaches age 65 can expect to live to age 86.1, compared with 79.7 for a man born in 1915.
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