Order Reprints

Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
This e-mail address is being protected from spambots. You need JavaScript enabled to view it

For the first time in at least three generations, many parents doubt their children will enjoy a higher standard of living than they do. Of course, that pessimism reflects the country’s slow climb out of the deep recession and the continuing 9.6 percent unemployment rate. It’s easy to be pessimistic when times are tough, but will our children really be the first in several generations to experience lower standards of living? No one really knows the answer, but I don’t share the gloom. GDP has been growing slowly for more than a year. If it can grow when the unemployment rate is 9.6 percent, it likely will continue to grow for many years, slowly raising the standard of living.

On the other hand, I’m convinced the odds our children will be able to retire are quite low. Pensions are disappearing, cuts in the level of Social Security retirement benefits are inevitable, and 30-years-and-out retirement giveaways for public workers are a disappearing luxury. The days of early retirements are over for most people in their 20s and younger. The only question is whether they ever can retire before health issues force them to. Here’s why I think the answer is: “No.”

The basic problem is that our retirement systems are broken, partly because of economic problems, and partly because of weaknesses in the human spirit. For starters, we all know the Social Security retirement system is on the path to bankruptcy without fixes that become more severe every day we delay. Some day in the future, when the system is at the brink of failure, Congress will get serious about making the needed changes. Those fixes likely will include significant increases in the retirement age, higher income taxes on benefits received, and higher contribution taxes. The result will be a reduction in the importance of Social Security as a retirement source for all but the current elderly and those living at or near the poverty level.

Another contributor to the retirement funk is the demise of pension funds. Only 19 percent of workers are covered by pension plans today — a number that has been falling for 30 years — and most benefits experts expect this trend to continue. The fact that so many pension plans are woefully underfunded — especially in the public employee sector — doesn’t bode well for the future. The only way these plans won’t go bust is for governmental units to close their pension plans to new employees, replacing them with defined contribution plans.

In defined contribution plans, employee participants choose whether to participate, elect how much to contribute, how to allocate contributions among investment choices, and whether and how often to reallocate their funds. All that sounds great, except it doesn’t work well for the majority of workers. Many don’t participate and don’t contribute even enough to take advantage of their employer matches. Workers who try to time the market doom themselves to lower returns. Many workers borrow money from their retirement plans, sacrificing retirement security for current consumption. The majority of plan participants also fail to adequately diversify their retirement plan assets, favoring the hottest mutual fund or investment style. Together, employee investment mistakes and lack of discipline to invest enough doom them to insufficient retirement funds.

The ultimate block to retirement, however, will be healthcare costs. You likely already know co-workers who are afraid to retire because they will lose their company-sponsored health coverage. Yes, there always will be Medicare (you qualify by turning age 65), but costs are skyrocketing. The Patient Protection and Affordable Care Act (ObamaCare) does very little to control rapidly rising healthcare costs. Quite the opposite, in fact. Already health insurers are raising their premiums to comply with requirements to add coverage for pre-existing conditions, to remove lifetime caps, and cover children up to age 26. On top of that, the act includes $500 billion in cuts to Medicare benefits over 10 years. In short, the costs of healthcare are still rising sharply, and will continue to do so. Our children and grandchildren will bear the burden of higher taxes, less third-party healthcare coverage, waiting lines, rationing and the inability to sock away enough money to retire because healthcare costs will suck dry their wallets.

The Social Security retirement age was set at 65 when FDR signed the act into law. That was in 1935 when life expectancy was 58. Today, life expectancy is 79. Had the age to receive full retirement benefits kept pace with increases in life expectancy, normal retirement age today would be 86. Those are the facts, but will be small comfort for our children and grandchildren who will still be working into old age and wondering what went wrong.

  Order Reprints

TAGS:

• column
• finance
• gregg dimkoff
• gvsu
• money talks