Eight major challenges facing Americans in retirement

How the elderly can provide for themselves in old age has become a topic of great concern in American society. A new research report from the Stanford Center for the Study of Aging states that the financial security of Americans aged 65 and over is better than that of those under 65, while a report from the Brookings Institution points out that Americans still face eight challenges in retirement.

Why do people over 65 have a high financial security index?

A report released by the Stanford Center for Aging in February 2016 stated that the financial security of people over 65 is better than that of young people and middle-aged people under 65. The Stanford Center for Aging used the Family Financial Security Index to observe people of different age groups. The Family Financial Security Index includes nine indicators such as cash flow, emergency savings, family assets, medical insurance coverage, social security funds, retirement funds and job stability. According to the Center’s Family Financial Security Index, the family financial security index of people aged 45-54 was 75 in 2000, and the family financial security index of people in this age group dropped to 68 in 2014. In 2014, the family financial security index of people aged 65-74 was 69, and the family financial security index of people aged 25-34 was 56.

Most of the elderly people over 65 in the United States belong to the baby boom generation. Their family financial security index is higher than that of people under 65 years old. This is because the elderly have reduced spending, while the US social security system provides basic living security for the elderly. At the same time, a large part of the baby boom generation enjoys a fixed monthly pension. In addition, some people over 65 continue to stick to their jobs, which naturally increases their income. Another financial factor that makes the family financial security index of the elderly over 65 higher than that of people under 65 is that they have less debt, own their own independent homes and have mostly repaid their housing loans. Although the report of the Stanford Center for the Study of Aging made an optimistic assessment of the family financial security of American retirees, how to ensure that the quality of life of the elderly after retirement does not decline is still an important aspect of the financial security of American families. A report from the Brookings Institution pointed out that Americans face eight challenges in retirement.

Challenge 1: Insufficient pension funds will affect the quality of life

According to a 2014 Gallup survey, among those who have not retired, nearly half of them are worried that they will not be able to maintain a good quality of life after retirement due to insufficient money. Over the past decade, Americans’ confidence in retirement has changed significantly with the ups and downs of the economy. From 2002 to 2004, 59% of Americans were confident that they would maintain a good standard of living after retirement. In 2009, the proportion of people holding this view dropped to 41%, and in 2012 it dropped to 38%. In 2014, Americans’ confidence in continuing to live a good life after retirement began to rise again, with the proportion exceeding 50%, but nearly 50% of people are still worried about not having enough money to spend after retirement.

Young people are still far from retirement, so a higher proportion of them are optimistic about their retirement life. However, the proportion of people who are optimistic about maintaining a good standard of living after retirement has dropped significantly among those aged 50-64 who are entering retirement. According to a 2014 Gallup survey, 55% of people aged 50-64 are worried that their living standards will decline after retirement. The results of a 2015 survey of retired people by the Employee Benefit Research Institute are slightly more optimistic. Only a quarter of retired people said that they lack money to spend after retirement and have no confidence in maintaining a good standard of living. The survey also shows that whether or not wage earners have retirement benefits before retirement has a greater impact on people after retirement. Among those who have traditional pension plans, 401K retirement plans and retirement savings plans before retirement, two-thirds are confident that they will continue to maintain a good standard of living after retirement, while among those who do not have the above retirement benefit plans, only one-third are confident that they will maintain a good standard of living after retirement.

Challenge 2: The longer you live, the more money you need for retirement

With the development of medical technology and the improvement of living standards, the life expectancy of Americans has also been greatly extended. According to the estimation of the US Social Security Administration, 90% of American men who turned 65 in 2015 can live to 70, 62% can live to 80, and 22% can live to 90. In 2015, 93% of women who turned 65 in 2015 can live to 70, 71% can live to 80, and 34% can live to 90. As people’s life expectancy increases, the cost of living will naturally rise. In addition to the cost of living, the cost of medical care and nursing will also gradually increase, which undoubtedly poses a great challenge for retired elderly people to spend their old age in peace.

Challenge 3: Rising medical and care costs for the elderly

For retired American seniors, housing and maintaining basic living expenses are probably not a problem. Most families have paid off their mortgages when they retire, so housing expenses will be reduced. And because food prices are low in the United States, food expenses will not be a burden. The most likely cost of living for the elderly after retirement is medical expenses. Although they can enjoy government-provided medical insurance at the age of 65, they still have to pay a certain proportion of their own expenses when seeing a doctor. If it is a serious illness, they will have to pay more out of their own pockets. The greater challenge facing the elderly in retirement is that once they can no longer take care of themselves and need long-term care, such expenses are difficult to cope with without sufficient savings. The survey also shows that among Americans who will reach the age of 65 in 2014, half of them will spend all their retirement money on medical care and long-term care in their later years. In 2015, the median amount of care expenses in the United States was $44,616 for home-based care, and the median amount of care expenses in nursing homes was $80,300. One solution to the high costs of long-term care is to purchase long-term care insurance, but only one in seven Americans over 65 have purchased long-term care insurance.

Challenge 4: Private enterprise employees have a heavy burden to save for retirement

A major challenge for Americans in terms of retirement benefits is that the traditional retirement system of private enterprises is gradually withdrawing from the stage of history. The new retirement system will put more responsibility for accumulating retirement money on individuals. In the past, private enterprise retirement benefits in the United States mostly paid a fixed amount of pension to retirees every month according to the salary and working hours of employees. According to statistics from the U.S. Council of Economic Advisers, in 1978, the amount of fixed monthly pensions in the United States accounted for 67% of the total pension amount. By 2014, the proportion of fixed monthly pensions in the total pension amount dropped to 34%. At the same time, the amount of 401K retirement savings plans and individual retirement savings plans, which are mainly based on personal savings, has also rapidly increased from 20% in 1978 to 58% in 2014. In 1989, 32% of people in private enterprises in the United States enjoyed retirement benefits with fixed monthly pensions. By 2013, the proportion of people enjoying this retirement benefit dropped to 13%. Although private enterprise employees can enjoy retirement benefits such as 401K, whether they can save enough money for retirement depends on their personal income and expenditure, their family’s ability to manage finances, and whether the return on retirement investment is good. For low- and middle-income people, if they cannot save a certain amount of retirement money through retirement benefits, they can only rely on social security funds issued by the government for retirement after retirement, and their quality of life is bound to be affected.

Challenge 5: Pre-retirees do not have a strong financial situation

People aged 55-64 can be called people who are close to retirement. In 2013, the median net worth of this group of people was $166,000. Among people who are close to retirement, 75% of their net worth comes mainly from housing, while financial assets account for a small proportion. Housing assets are real estate, which can be used as shelter, but if you want to spend money, you have to sell the house. According to the 2014 U.S. Consumer Finance Survey, in 2013, the median net worth of the 25% of people who are close to retirement in the United States with the lowest net worth was only $42,460, of which housing assets accounted for 50%, other non-financial assets accounted for 28%, and pension assets accounted for 21%. Among the 25% of people with the lowest net worth, the median net worth of their families was $165,720, of which housing assets accounted for 47%, business assets accounted for 4%, other non-financial assets accounted for 14%, financial assets accounted for 8%, and pension assets accounted for 27%. Among the 25% with the highest net worth, the median household net worth is $417,450, of which housing assets account for 37%, business assets account for 5%, other non-financial assets account for 14%, financial assets account for 14%, and retirement assets account for 30%. Among the top 25% of the net worth, the median household net worth is $1,485,000, of which housing assets account for 14%, business assets account for 23%, other non-financial assets account for 13%, financial assets account for 30%, and retirement assets account for 20%.

Challenge 6: Lack of common sense about financial risks and investment methods

Civil servants in the United States enjoy the benefits of receiving a fixed amount of pension every month, and their pension money is guaranteed. However, private enterprise employees now rely on their own savings for retirement. Only by investing these accumulated pension money in the financial market can the interest compounding and the amount of pension money increase. However, many American families lack common sense about investment and financial management, and are even more ignorant of financial market risks and investment methods. American scholars have found that among people aged 25-34, only one-third can accurately answer basic financial questions such as compound interest rates, inflation and risk diversification; among people aged 45-54, the proportion is 43%; among people aged 55-64, the proportion is 48%. When private enterprise employees invest their pensions in the financial market, if they lack basic common sense about investment, they often cannot choose the best investment method; if they leave the investment to a financial advisor, they often have to pay higher service and management fees.

Challenge 7: Social Security Funds Face Difficulty of Insufficiency

For low- and middle-income families in the United States, social security benefits are their main source of income after retirement. However, social security benefits in the United States are facing the dilemma of being unable to make ends meet, and relying on the government for pensions has become unreliable. Social Security is the largest social benefit in the United States. It relies on payroll taxes paid by current working people to provide pension funds for retired people. By 1960, nine workers in the United States paid payroll taxes to support one retiree receiving Social Security benefits; by 1985, five workers paid payroll taxes to support one retiree receiving Social Security benefits; by the mid-2000s, It is the payroll tax paid by 4.3 workers for one retiree to receive Social Security benefits. The current problem facing the U.S. Social Security Benefits is that a large number of baby boomers are entering retirement age, and the retired population is growing rapidly. At the same time, the employment ratio of young and middle-aged Americans in the labor market has declined, and fewer people are paying and receiving it. There are too many people with money, and in the end there is not enough money to spend. Social security funds have a significant role in reducing the poverty rate of the elderly. However, due to the above contradictions and the extension of people’s lifespan, the amount of pensions paid by the government has also increased. In 1962, the federal government’s expenditure on Social Security payments accounted for 13.4% of the total budget expenditure. In 2014, this proportion increased to 23.5%.

Challenge 8: It is difficult for low-income families to save money for retirement

After the change of the retirement welfare system in the United States, the retirement funds of private enterprise employees mainly come from the 401K retirement savings plan, which requires employees to save money for retirement, and the company will also invest money in the retirement savings plan according to a certain proportion. In order to encourage people to save money for retirement, the federal government has implemented a tax deferral policy for the 401K retirement savings plan and the individual retirement savings plan. According to statistics from the Joint Committee on Taxation, in 2014, the federal government reduced taxes by 95 billion US dollars due to the tax deferral benefits provided for retirement savings. The report of the Congressional Budget Office pointed out that the tax preferential policies implemented by the government for people to save money for retirement have benefited the most to higher-income families, because these families have the financial ability to save more money for retirement; the top 20% of families have received 66% of the tax deferral amount for retirement money. For the middle- and low-income people, most of their income is used to support their families, and they can’t invest much money in retirement savings, and it is difficult for them to save money for retirement. Most of these people have to rely on social security benefits for retirement after retirement.