3 Changes That Could Improve Retirement

Lack of retirement savings and rising healthcare expenses are huge challenges.

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Congress and the states are struggling with soaring deficits and the widening recognition that the United States is broke, if not bankrupt. On a personal level, the same reality confronts millions of Americans moving closer to their retirement years. Most people do not have anywhere near the amount of money they will need for retirement, and there are no easy answers in sight.

[See 10 Ways to Boost Your Social Security Checks.]

Unfortunately, it's not clear that Congress knows what to do about consumers, either. As it grapples with the deficits, it must restore Social Security's self-sustaining financial foundation. This will be a contentious fix, but in financial terms, not so hard. Dealing with Medicare and Medicaid will be much, much more difficult. But the toughest challenge may not be to restrain the programs' out-of-control spending trajectories. Instead, it will be to reinvent retiree income and medical programs and offer us a reasonable chance at enjoying our later years.

Right now, millions of us do not have a prayer of a satisfactory retirement.

Every year, the Employee Benefit Research Institute (EBRI) publishes a detailed look at Americans' confidence in retirement. Not surprisingly, reports during the Great Recession have been pessimistic. In 2000, 72 percent of employees were either "very" or "somewhat" confident they would have enough money to live comfortably in retirement. Those totals dropped to 54 percent in EBRI's 2009 and 2010 surveys. Those numbers were for employees. For people already retired, 75 percent were "very" or "somewhat" satisfied about their retirement outlooks in 2000. Last year, the total had dropped to 60 percent.

The figures are worse when it comes to retirement healthcare expenses and the adequacy of long-term care finances. As recently as 2007, 66 percent of employees were either "very" or "somewhat" confident that they would have enough money to pay their medical expenses in retirement. Last year, only 49 percent felt that confident. Thanks to Medicare and, possibly, the 2006 law for Medicare prescription drug coverage, 77 percent of retirees were "very" or "somewhat" confident in 2007 that they could pay their medical bills in retirement. Last year, only 65 percent felt that way.

[See Social Security, Medicare a Bargain for Many.]

Long-term care has become a rising concern because of substantial gains in longevity and the rising numbers of people forecast to get Alzheimer's Disease. "It is expected an estimated 10 million baby boomers will develop Alzheimer's. Of those who reach the age of 85, nearly one in two will get it," the Alzheimer's Association said last month in its report Generation Alzheimer's: The Defining Disease of the Baby Boomers.

Between 2007 and 2010, the percentage of current workers who felt "very" or "somewhat" confident about having enough money for their long-term care expenses fell from 53 percent to 37 percent, meaning that more than 60 percent of workers were not sure about having enough money. Among retirees during those years, this confidence percentage fell from 60 percent to 43 percent.

Underlying these perceptions, EBRI and other researchers have long reported, are consumer savings and investment patterns that fall far short of supporting even the most negative consumer confidence findings about retirement. "More than half of workers report they have less than $25,000 in total savings and investments," EBRI said in its 2010 report. That total excludes any home equity and pensions. Most retirees rely on Social Security for most of their retirement income, and have little or no private savings.

Three changes are needed to improve our retirement prospects:

1. More guaranteed retirement income. Left to our own devices, we do not save enough for retirement and don't do a good job at investing what we do save. We need more Social Security or something like it. Uncle Sam can't afford it, so we'll have to pay for it ourselves. This could happen with a mandatory expansion of employer-based 401(k) programs. A new government retirement annuity benefit, funded with private dollars, has also been proposed by many retirement experts. A modest version has been pitched by the Obama Administration but has not gotten much attention or support. Properly designed, however, spending a dollar today on such a retirement-income program could save us much more than a dollar in future Medicaid costs.

[See Seniors 'Near Poverty' at Risk in Deficit Cuts.]

2. Big healthcare savings. The United States spends twice as much money on healthcare, per capita, as many other countries whose people are healthier than Americans. Health reform, for all its contentious provisions, only scratches the surface of runaway healthcare costs. I personally doubt we can rein in these costs without effectively nationalizing healthcare. But I respect those with a different opinion. They just need to lay out a plan that keeps our current private system in place and reduces healthcare from 20 percent of the economy to 15 percent or less over the next 20 years. They need to do it without harming the elderly and disabled. And they need to do it soon.

3. Long-term care protection for everyone. Medicaid is our default long-term care provider, to which people turn after exhausting their private resources. It is already on an unsustainable financial path, even before the projected wave of baby boomers starts needing its services. States provide about half of Medicaid funding, and many of them are reducing benefits to curb their own deficits. We need a better way. Private long-term care insurance can be expensive and is owned by a small percentage of older adults. Private insurers have had limited success trying to introduce less expensive products and group coverage. The health reform law did include a new government long-term care insurance program that would be voluntary and funded by employee contributions, much like a 401(k) plan. Like Social Security, it would provide a modest level of long-term care benefits. Together with private long-term care insurance and other governments, this new safety net might provide a better solution for millions of increasingly long-lived Americans. However, the CLASS program (Community Living Assistance Services and Supports), as enacted, was badly designed. U.S. Health and Human Services Secretary Kathleen Sibelius recently said CLASS would be restructured and she reaffirmed that it would be funded entirely with private dollars.

Twitter: @PhilMoeller