Moody’s Investor’s Service released a statement this month detailing the $20.4 trillion retirement predicament currently plaguing the U.S. government. In the report, the credit agency breaks down the projected “unfunded liabilities” of various government pension systems, and even more worrisome, the growing liabilities of Social Security and Medicare programs that are expanding the funding gap even further.
Says one Senior Vice President at Moody’s, Steven Hess, “As the stand-alone sustainability of these two programs wanes with an aging population, Social Security and Medicare will be among the primary drivers behind a sharp widening of federal budget deficits that is expected to occur after the fiscal year 2018.”
Duquesne Capital Management founder Stanley Druckenmiller describes the predicament as “the most unsustainable situation” he has witnessed.
In a recent interview with CNBC, he states:
“We have pulled so much demand forward and borrowed so much from our future, so much financial engineering has gone on.”
As the senior population grows, eventually eclipsing the working population paying into the system, it is clear that if changes aren’t made to our current retirement system, America will be faced with a severe economic dilemma.
Or as Tony James, President and COO of global asset-management firm, Blackstone calls it, a “hidden crisis”.
One possible reason for this crisis being “hidden” is that there are those who choose to believe that there isn’t a crisis, among whom is Andrew Biggs of the American Enterprise Institute. In his WSJ article this year about the “phony retirement crisis,” Biggs proclaimed that “Social Security’s promised benefit levels are far more adequate than is often portrayed.”
However, with the booming number of retirees and shrinking workforce, the U.S. government does not have the funds to pay the growing number of retirees. In addition, with fewer companies offering pensions, people are more reliant on retirement accounts that don’t earn as much, which may result in future retirees having to delay their retirement till their seventies, if they’re able to retire at all.
According to The New School’s Schwartz Center for Economic Policy Analysis, an estimated third of the working population is in danger of becoming a “ poor or near-poor older adult, having to survive on less than $20,000 per year.” These “near-poor” retirees are also projected to triple in number to 25 million by 2050, per a CNBC report issued by Tony James and noted economist and economics professor at The New School, Teresa Ghilarducci.
It is unlikely that there is one catch-all solution for this growing problem, but there are several possible solutions that can help us begin to turn things around.
In a New Hampshire Business Review Report, Ronald O’Hanley, President and CEO of State Street Global Advisors, Inc., and former President of Asset Management at Fidelity Investments proposes that lawmakers “double the default automatic enrollment 401(k) savings rate to at least six percent.”
As another possible solution, Ghilarducci suggests in a Time.com interview to raise the Social Security minimum monthly benefit by $150 to match the minimum poverty level ($980).
Although finding solutions is indeed an important step, it is also imperative that we acknowledge this problem as a country in order to move forward.
As O’Hanley warns in a sobering message this year to the U.S. Chamber Commerce, a “looming catastrophe” awaits us “if we don’t get serious about addressing the inadequacy in our retirement savings system.”