Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Categorized | Financial

US building up to pension crisis

Posted on September 20, 2016

PHILADELPHIA, PA - JULY 25: An elderly woman watches from her front stoop as Bernie Sanders supporters are joined by other groups as they march towards FDR Park on the first day of the Democratic National Convention (DNC) on July 25, 2016 in Philadelphia, Pennsylvania. The convention is expected to attract thousands of protesters, members of the media and Democratic delegates to the City of Brotherly Love. (Photo by Spencer Platt/Getty Images)©Getty

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.

    chart: US retirement savings by age

    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.”

    chart: Many US households have no retirement savings

    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.