Why Retirees Are a Threatened Species

Even without cuts to Social Security and Medicare, prospects for senior finances are dim.

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BOSTON—With investment and real estate markets recovering, and cuts to Social Security and Medicare at bay for the time being, it would be comforting to paint a rosier picture of the retirement prospects for the surge of baby boomers continuing to reach retirement age every day.

Elderly woman looks sad
Older workers may become an increasing drag on some businesses, as their salaries and insurance rates tend to be higher.

Alicia Munnell, director of the Center for Retirement Research at Boston College, would like to don those rose-colored glasses as much as the next person. But she does not see a positive future for retirees. In fact, her outlook is, well, awful.

It's not that Munnell sees damaging cuts to Social Security or Medicare on the horizon, either. Her dour assessment includes some trims, but not necessarily deep cuts.

"I'm very much in a doom-and-gloom mood about what's coming down the road," she said in a recent interview at the Center's offices at Boston College. "I used to fuss about this movement from [defined benefit pensions] to [defined contribution pensions] and thought that was the real problem."

[Read: Cures for Pre-Retirement Anxiety.]

Now, she is more concerned about other cuts. "The real thing that's happening is that Social Security is going to provide less. I think we're going to go back to the 1950s in terms of the importance of Social Security to people's retirement portfolio," Munnell says.

A big reason stems from the major 1983 reforms to the program. "In the 1983 legislation," Munnell explains, "they put in provisions that would tax Social Security benefits. And there were thresholds of $28,000 for an individual and $33,000 for a couple."

Like the widely detested alternative minimum tax, these thresholds were not adjusted for inflation. "They're not indexed, for prices or wage growth or anything," she says. "So just as the whole level of benefits goes up, more and more households are over this threshold." And whereas the average guy wasn't paying taxes before, the average guy will be paying them in the future.

With average retirements lasting 20 years, there are only three ways to deal with retirement savings problems, Munnell says. And you're not going to like the first one: Be poor. Her second choice is to save more money during your work life "so you're a little poorer over the whole span."

She is particularly upset that the American worker was somehow convinced long ago that "retirement was cheap" and that he needed to set aside only 6 percent of his pay in a 401(k) and watch it increase to 9 percent with a 3-percentage point employer match. "It's not enough," she says. "You need a lot more than that."

[Read Your 401(k): Good or Lousy?]

"We want to, right now, support ourselves for at least 20 years in retirement," she explains. "Think about how expensive it is to buy your food, rent, clothing for 20 years with no money coming in from earnings. It's just huge."

The third and, to her, only really meaningful choice is to keep working. "Working longer is really key here," Munnell says. "It allows you to take advantage of the actuarial benefits in the Social Security system" for deferring retirement.

"If you take five years off your retirement years and add them to your working years, your ratios look a lot better," she notes.

"The other thing that I think about is the house," Munnell adds. "I think the house is just a very important asset." She advises people still in their 50s to consider reducing their expenses by selling their residence and renting. "I believe so much in using your house ... People need to move the house into their retirement-income thinking."

[See 10 Ways Your Home Can Pay You Money.]

Despite widespread research and news reports that Americans lack sufficient retirement savings, Munnell says the problem has not yet been acknowledged.

"I think at some point in the not too distant future, as cohorts arrive at retirement with their 401(k) plans holding $120,000, and that's all they have in addition to Social Security, that there will become a generalized public understanding that people don't have enough money," she says. Now, however, "a lot of people are still retiring with [defined benefit] pension plans. So, I don't think the full reality has hit yet at all."