Every two weeks, Jo Johnson, a 54-year-old digital media project manager in Philadelphia, takes a third of her salary and stashes it away in a retirement account on top of the money contributed by her employer. Her thrift is driven by necessity.
Ms Johnson has bounced between different jobs. Patchy contributions to her pension plan has meant that retirement was looking far leaner than she would have liked, spurring a more thrifty approach three years ago. Her husband, Andrew Marshall, a consultant, makes a good living, but “when I look at the numbers they are a little scary”, she admits.
“We’re doing extremely well, but we’re still playing catch-up. We’re being as frugal as we can be,” she says. “Our retirement plan has simply been glued together over the years.”
The modern US pension system was largely built when people tended to work in one job or company their entire lives. But a mish-mash of unemployment, part-time employment or self-employment is now the norm, and Ms Johnson’s predicament of sporadic contributions is increasingly common. Worse, many Americans have no retirement savings at all, setting the stage for a social crisis as they retire in near-penury.
The numbers are severe. According to the National Institute on Retirement Security, nearly 40m working-age households — 45 per cent of the total — had no retirement savings whatsoever in 2013, whether an employer-sponsored 401(k) plan or an individual retirement account (IRA).
The pensions industry has lately focused on the negative impact of low bond yields and subdued investment return expectations on “defined benefit”, public pension plans and individual “defined contribution” plans like the US 401(k). But the real brewing US retirement crisis is the number of people that have no nest egg whatsoever, argues David Hunt, chief executive of PGIM, Prudential Financial’s asset management arm.
“If you look for the real black hole in the pension system, this is it,” he says. “And these are the most vulnerable people in society.”
Indeed, while younger people are less likely to have some sort of a retirement nest egg than older Americans, the biggest factor is income. Households with a retirement account have a median income of $86,235, while those without one have a median income of $35,509, according to the NIRS.
Many are self-employed or work in smaller companies, which in many cases do not have the organisational heft to set up a 401(k) plan. Big companies in low-wage industries are also less likely to offer a retirement plan. And on modest wages, it becomes harder to set aside money for an IRA.
“We have a crisis unfolding here,” says Russ Kamp, a pensions consultant. “We’re asking people to set aside precious resources they don’t have . . . For millions and millions of Americans, the only thing they’ll have is Social Security.”
Social Security is a federal system originally set up by Franklin Delano Roosevelt in 1935 and financed through payroll taxes. Together with the Supplement Security Income programme, it accounts for over 90 per cent of the income for the bottom quarter of retirees, according to the NIRS.
But Social Security only provides about 35 per cent of a typical household’s pre-retirement income. This is inadequate for most retirees, and especially so for those without some other savings to fall back on. “Because Social Security is so limited, we are far more dependent on 401(k) plans,” Mr Hunt points out. “In an era where people change jobs often and do more gig type jobs, this is a huge challenge.”
But the Social Security backstop has itself come under political attack in recent years. When it was set up, retirees would only have to be supported for less than 13 years on average. These days the average American can expect to draw Social Security for almost two decades, and unlike traditional public sector pension plans, it operates on a pay-as-you-go basis. Citi earlier this year put the unfunded liabilities at over $10tn, which will strain the government’s finances for decades to come.
Nonetheless, given the importance of Social Security to poorer retirees, it is more important to bolster than winnow the programme of resources, to prevent a broad destitution of the elderly population, the NIRS argued in a report earlier this year. Both presidential candidates have indicated that they will protect Social Security from cutbacks, but without a significant bolstering, many Americans will still face a sorry retirement.
“When people say there’s no crisis, I just ask ‘Have you looked at the numbers?’”, says Diane Oakley, executive director of NIRS. She predicts that elderly poverty rates will rise sharply in the coming years, causing social dislocations.
“I come from a family where mothers would move in with their daughters. I don’t have any children, but I’m being very nice to my nieces and nephews,” she says.