From the April 2007 issue of Treasury & Risk magazine

Boomer to Bust

Pat Wechsler, Treasury & Risk: Do you believe the nation is prepared for the retirement of the so-called baby boom generation? Munnell: No. First, many boomers are likely to retire too young--around 62 or 63 when they will face an average of 20 years of living off their retirement savings. Married couples face the prospect of at least one member surviving until their mid-nineties, which translates into some 30 years of retirement. Second, our national retire-
ment income system is contracting. Social Security benefits as a share of pre-retirement income are declining, given the higher full-benefit eligibility age to retire. Medicare premiums, which are deducted before Social Security checks go in the mail, will take an increasingly larger bite, and more benefits will be taxed under the federal personal income tax. That will leave boomers more dependent on 401(k) plans, and the typical boomer balance today is only $60,000.

T&R: Is it a myth that baby boomers will be healthier and better able to work longer?
Munnell: The majority of baby boomers will indeed be healthy enough to work until their mid- to late sixties. But as long as Social Security continues to offer actuarially reduced retirement benefits at age 62, many will leave the labor force early and have to rely on inadequate benefits over an extended retirement span. Increasing Social Security's early eligibility age would improve work incentives, but this would need to be done carefully since 15% to 20% of those in their sixties will be incapable of working beyond 62.

T&R: What changes in corporate policies and attitudes are needed to accommodate healthier seniors who want to work?
Munnell: First and foremost, individuals must understand that they need to work longer. They need to have a plan to work full-time until at least 65 and not allow themselves to be buffeted by events. Employers, for their part, need to be willing to retain, train and even hire older workers. But older workers are costly. In response, policymakers could make older workers more attractive by enacting changes aimed at reducing costs. For example, workers with 40 years of contributions to Social Security could be considered "paid up" and exempted from the payroll tax. Medicare --rather than employers--could serve as the primary payer for healthcare costs for those 65 and older. And mandatory retirement could be reinstated so that employers had some way to retire older workers whose productivity had declined, while retaining higher productivity workers by rehiring them as independent contractors.

T&R: What steps should the nation be taking now to prepare for the sizable numbers of boomers unable to work longer?
Munnell: Without changes in our retirement income systems or retirement patterns, poverty among the elderly is certain to increase. Several changes could make our retirement system more robust. First, enact legislation that requires 401(k) plans to have automatic enrollment and other features that relieve individuals of much of the decision-making. Next, maintain Social Security benefits at the level scheduled under current law--a step that will require a significant increase in the payroll tax. And finally, introduce a new layer of protection--a universal defined contribution plan on top of Social Security.


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