America Has a Growing Retirement Income Problem

Last spring USA TODAY reported “61% of Americans 50 and up are worried they won’t have enough money for retirement.”   In 2015 a survey found only 22% were concerned.

In 2020 the 65 and over population was 55.8 million – that’s roughly 1 in 6.  The 50 to 64 group adds 63.4 million.  The combined group worried about their financial future would be over 75 million.

This is a problem that dates to decisions made by business and political leaders starting 50 years ago.  Today there is no solution for retirees or those who expect to retire this decade.  There is not enough time for older workers to accrue an adequate retirement income.

It will get worse if Congress fails to initiate changes in Social Security to correct a funding problem known for a decade or more.  If Trump and the Congress pass the tax proposals he voiced in the campaign, Social Security will run out of money early in the next decade. 

Looking to the next generation of retirees, there is a potential solution.  That is enacting a federal version of a state-sponsored retirement plan to enable all workers to save for retirement.   State plans are important but they do not allow workers to continue participating if they relocate to another state.

But for many workers, once they stop working, their income is largely fixed and living costs continue to increase.  That’s a problem for them and as their numbers grow for the economy.

The Underlying Problem – Demographic Trends

From 2010 to 2020, the 55 and older population increased by 22.4 million while younger age groups added only 300,000.  That reflects the aging of the Boomer generation.  The over 65 population is projected to grow to 73 million in 2030. 

Significantly, the Census Bureau projects the 18 to 24 age group will increase by only 200,000 by 2030 (and decrease by 2035).  For an economy to continue growing, retiring workers have to be replaced by young workers.  In several countries, that’s a recognized problem; it’s most serious in Japan.

The U.S. has an advantage – young immigrants have continually been added to the workforce. 

Longevity has also increased steadily.  Now men in the United States aged 65 can expect to live 17 more years on average. Women aged 65 years can expect to live almost 20 more years. 

The data analytic firm Lightcast recently released the report, “The Rising Storm”, where they argue with the “enormous cohort of 76 million [Baby Boomers] . . . ready to retire the US faces a shortfall of millions of workers in the decade to come.”  The trends have repercussions for the Social Security system, the country’s workforce, the economy, and for paying other costs associated with an aging population.

The trends shifted somewhat in the COVID crisis but it’s clear – when individuals stop working, their lives and the financial circumstances change significantly.  It’s also clear that going forward employers in all sectors will experience staffing problems and need to consider talent they might have ignored in the past.   

Social Security Funding Problems

When the Social Security Act was enacted in 1935 with retirement age as 65, the average life expectancy was 60.7   Germany’s national retirement system was the model, with retirement at age 70, but that was lowered to age 65 in 1916.  In the US, age 65 was a compromise, there was support for age 60.

The original benefit was based on a complex formula changed in 1939 to 40 percent of the first $50 of average monthly wages, plus 10 percent of the next $200. When the first benefits were paid in 1940, the average worker earned $113 a month.  The average benefit was estimated to be $22.71 or 20% of the average monthly earnings.

Today the average monthly earnings is $4.949 and the monthly benefit is $1,862 and or 38%. (Social Security was planned to replace 40%)

But with the growing number of workers retiring and living longer, along with the smaller number of GenZers starting careers and paying taxes, actuaries project the Social Security Fund will be depleted around 2034. That’s a problem with a ‘pay-as-you-go’ system – too many retirees and too few workers paying taxes.  If nothing changes, the benefits for all recipients will have to be reduced to 83%.  A ‘watchdog’ group reported the cuts could be “up to $21,800 a year [for a couple] if Congress doesn't act.”

If benefits have to be reduced, projections show it will hurt 77 million people (the population 65 and older in 2034). Three alternatives to address the funding problem are raising the ages for benefit eligibility, increasing the Social Security tax rate (employers and employees both pay 6.2% of employee compensation) and/or raising the cap on taxable income, now $168,600. The first and second alternatives would also hurt millions of workers. Raising the cap would affect a limited number of taxpayers.

Neither Trump nor Harris announced specific plans to address the problem, although President Biden’s 2025 budget proposal favored raising the cap on taxable income.  From the budget proposal, “protecting Social Security should start with asking the highest-income Americans to pay their fair share.”

Significantly, the Committee for a Responsible Federal Budget found four of Trump’s tax proposals – ending taxes on Social Security, overtime pay and tips, plus deporting working immigrants – would reduce taxes paid by employees and employers to the Social Security system, adding to the insolvency and forcing the cuts sooner, by 2031.

The End of Pension Plans

There was a time now a half century ago that financial planning for retirement involved three components – the 40% coming from Social Security, a defined benefit pension, and private savings.  A 1980 BLS report shows 87% of the private sector workforce participated in a pension plan.  Effectively all plans then were traditional defined benefit plans.  It was in the early 1980s that President Reagan and Congress passed laws supporting the introduction of savings plans. 

With defined benefit plans, employers are liable for current and future costs.  With savings plans the liability shifts to employees and their decisions.  Switching to savings plans cut company costs significantly.

A column in the Los Angeles Times captured what happened, “We loved our pensions. Then our employers took them away.”  From the column, “Pensions were part of the ‘fabric of our society’ until they were taken away.” 

One column dates the demise to 1984, a year or so after a recession and the start of Reagan’s second term.  In 1983 there were 175,000 defined benefit pension plans; in 2020 the total was 34,000 but 75% had fewer than 50 employee participants. 

Today only government employees and members of a few unions can count on income from defined benefit plans.  In the private sector only 11% of workers participate in a defined benefit plan.  In the  nonunion plans, over half are frozen (barring new participants and/or freezing accrued benefits). 

In contrast, there are just under 700,000 defined contribution plans with 85 million active participants.  Of the total private sector workforce, however, only 52% of the 135 million workers were participating in either or both a defined benefit or defined contribution retirement plan. Roughly 65 million workers do not have a plan at work to save for retirement.

That triggered the idea for states to create savings plans for workers in companies that have no retirement plan.  A count at the end of 2024 shows 21 states have plans or are in the process of implementing a plan.

But having access to a defined contribution plan is not a guarantee that adequate savings will be available at retirement.  Withdrawals and poor investment returns prior to retirement would reduce the funds.  An AARP survey found “1 in 5 adults 50+ have no retirement savings.”  

The option for those with inadequate savings is to continue working if their health and family circumstances allow. 

Deferring Retirement to Continue Working

On paper the easiest way to maintain an adequate income is to continue working and defer retirement to the late 60s and 70s.  But a core problem in the US and across a number of developed countries is entrenched age discrimination.  Workers as “young” as their early 50s report experiences at work when they were ignored or passed over for promotion. It’s age discrimination and it’s all too common. 

Unfortunately, the courts have made it difficult to prove age discrimination is the reason for employment problems.  An added barrier is an appeals court decision that the word “employee” in the ADEA means the law does not protect older job applicants.

Now, with mounting retirements creating job vacancies and smaller numbers in the age 20-24 group starting careers, the legal barriers deter filling vacancies.  All qualfied workers will be needed

‘Experts’ cite reasons for not hiring older workers – resistant to change, remind younger workers of their parents, not socially accepted, high pay expectations, expected lower productivity, etc. There is also the argument that older workers do not have adequate tech skills but the COVID crisis and working remotely forced all workers to develop better job related tech skills.

But there are counter arguments, especially at a time when, from a recent Fortune headline, “Gen Zers are being branded as unemployable.”  Older workers bring their experience and skills to the job, reducing the cost and time to train and make a worker productive. They are also less likely to quit, have a strong work ethic, have important ‘soft’ skills, and can be productive with little or no supervision.  In jobs where they interact with customers or suppliers, they often have better communication skills.

The argument that their ‘seniority’ drives up their pay is offset by the fact that those eligible for Social Security may not need the costly benefits, especially health insurance.  Those who have a pension or adequate savings could agree to work as self-employed contractors. Retail businesses like supermarkets routinely employ part time workers.  When the lower payroll costs are combined with their higher productivity, they are often cheaper than young workers.

Columnists focus on the financial reasons for deferring retirement – higher income, increased savings, higher Social Security, and continued reliance on an employer’s health insurance -- but research also shows that there can be mental health benefits to continued working.  Working can give workers a purpose and a daily routine, insures continuous social interaction with colleagues and coworkers, and has positive effects on memory and mental processing capacity. Boredom can be a problem.  A study in France suggests workers are less likely to develop dementia, including Alzheimer’s disease.

But those are the positive reasons.  When the negative reasons are dominant – daily job stress, discrimination, required physical strength, or simply hating a job – it’s time to quit.

The demographic trends make it clear employers cannot afford to “write off” older workers.  A new book, “The Longevity Imperative: How to Build a Healthier and More Productive Society to Support Our Longer Lives”, by Andrew Scott, provides an important new view of aging and how to redefine the role of older workers.  He argues, “The aging society narrative encourages seeing longer lives as a problem and not an opportunity.”  The mounting job vacancies make it important to rethink how older workers are used.

Japan is the only country where those aged 60 and over represent 30% or more of the population. By 2050, 62 countries, including China, will reach that milestone.  The US has had the benefit of immigrants hoping to build better lives but that could end.  Keeping older workers in the workforce benefits everyone.

 NOTE -- The data in the article were updated when possible from my book, Older Workers Ready to Hire (2023, available on Amazon)