Rethinking retirement: Alternative approaches to retirement woes on the horizon

Blog Post

With the upcoming election, and the ongoing wave of baby boomers entering retirement, the concern of whether that generation and the ones that follow it will have enough saved is on many decision makers’ minds. The frightening landscape of retirement was highlighted in the recently released Annual Report of the Board of Trustees responsible for overseeing the Social Security pension trust. The Annual Report provided that the rate at which baby boomers are retiring is surpassing the rate of covered workers able to contribute to Social Security. Soon the system will be operating at a loss. Beginning in 2020, the annual cost of Social Security benefits will exceed its total income, and reserves will begin to decline. At current rates, the reserves will continue to decline until they are completely depleted, which the report provides will happen in 2034. After 2034, Social Security income will only cover 77 percent of benefits. These statistics are exacerbated by the fact that most of us face a much longer life expectancy than those before us. While many report this landscape as not being as dismal as once thought, the issue of facing and preparing for the depletion of Social Security reserves still weighs heavy.

So just how bad is the Social Security situation? In a recent study released by the Insured Retirement Institute, only 22 percent of baby boomers are confident that they will have enough in savings to retire. This number was down from 37 percent in 2011. Much of this uncertainty is due to the fact that baby boomers have not saved enough on their own with just 55 percent having any retirement savings. Of that 55 percent, 42 percent report their savings to be less than $100,000, which amounts to just $7,000 per year. Consequently, 60 percent of baby boomers reported that they expect Social Security to be their main source of retirement income. 

In hindsight what would the baby boomers do differently – 68 percent report that they wish they had saved more for retirement, and 67 percent report they wish they had started saving earlier. Therefore, government leaders on both sides of the aisle have been pushing for creative approaches to push people towards recognizing the importance of saving for retirement, instead of relying on Social Security. Just last week, the Senate Health, Education, Labor, and Pensions Subcommittee on Primary Health and Retirement Security held a roundtable hearing discussing legislation which would remove some of the hurdles currently faced by multiple employer retirement plans. Multiple employer plans allow several small companies to create one retirement plan in which they each participate. This allows those companies to cut back on expenses which may otherwise make it prohibitive for them to provide plans. 

Multiple employer plans should not be confused with Multiemployer plans which provide retirement benefits for union employees under collectively bargained arrangements, and are currently facing major financial crisis. Multiple employer plans are hindered by rules which require participant companies to all share a common nexus, such as all being in the same industry, trade group, or something similar. Additionally, multiple employer plans have a “one bad apple” rule under which one participating employer’s action disqualifying the plan (for its tax deduction qualification status) will disqualify the entire plan, affecting all employers participating in the plan. The proposed legislation discussed at last week’s roundtable would remove the “one bad apple” rule and would remove the common nexus requirement for multiple employer plans. 

Instituting state run retirement plans is another retirement alternative gaining momentum across the country. As we previously reported, what initially started in Illinois has now expanded to three more states, Connecticut, Maryland, and Oregon, which have adopted legislation putting these types of programs in place, with several more considering doing the same. Each of these state’s legislation either requires employers to provide a retirement plan to its employees, or requires them to seamlessly connect employees to a state run retirement plan. The first of these programs to actually go into effect is expected to take place next year. These programs are quite controversial and are expected to be big ticket issues at state level elections across the country this upcoming November. While both President Obama and Senator McCain’s platforms in the 2008 presidential race supported mandated retirement programs, congressmen, especially Republicans, have been hesitant to place more requirements on businesses in the wake of the Affordable Care Act. 

Employers that have questions about how to better prepare themselves for this anticipated shift in the retirement world should closely monitor these developments and consult their benefits attorney for specialized advice.