The National Research Council along with three other groups released a sobering report about aging earlier this fall.
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In the United States, the weak economy that has followed the global financial crisis has ended many working careers prematurely. Meanwhile it also has lowered the value of many other components of household net worth, such as corporate equities and housing stock value, leaving many people ill-prepared to support themselves in retirement.
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Research suggests that between one-fifth and two-thirds of the older population have under-saved for retirement. Low and lower-middle-income households accumulate few financial and pension assets for retirement. Social Security, Medicare, and Medicaid are and will be a central part of maintaining their living standards in retirement.
Financial literacy will play an increasingly important role in how well households fare in their retirement years. Households will need to decide how much more to save and how to structure their portfolios during their working years. They will need to decide when it is economically prudent to retire, taking into account personal, macroeconomic, and political uncertainties. There is substantial value in boosting financial literacy to help people prepare for these financial decisions.
The report notes that longer and healthier lives are a great benefit and suggests that these added years of healthy life cannot all be taken as post-retirement leisure. Working longer, postponing retirement or working longer hours before retirement must be factored in because if all of the added years are taken as leisure, then consumption at all ages must be considerably reduced to pay.
About half of the U.S. workforce is covered by an employer- sponsored retirement plan. But the structure of pension plans has changed dramatically over time. Today, employer plans in the corporate sector have mostly converted to defined contribution (DC) pensionsÛÓfor example, 401(k) or 403(b) plans. That shifts the burden to individuals who may have difficulty determining whether their saving is adequate for their retirement needs.
Raising the average age of retirement is one key alternative to reducing the consumption associated with leisure and enhancing peopleÛªs ability to stretch their assets over their lifetimes. The average retirement age for men declined substantially in the U.S. throughout most of the 20th century. Although this trend stopped in the early 1990s and then reversed, men still retire at a much younger age than in the past, despite their better health and much longer lives. WomenÛªs average age at retirement has moved parallel to men over recent decades.
The report concludes that there is little doubt that there will need to be major changes in the structure of federal programs. The transition to sustainable policies will be smoother and less costly if steps are taken sooner rather than later.åÊ