Retirement is supposed to be a period where you live a relaxed, comfortable life. But for many Americans, meeting daily expenses in their later years is proving to be a difficult affair.
Retiring in poverty
A study conducted by SCEPA, a think tank from The New School, found that two in five American senior citizens and their partners will undergo downward social mobility during retirement. The study states that “downward mobility is caused by a lack of savings, and can’t be prevented by working longer. The crux of the matter… is that small retirement account balances of today’s retirees aren’t providing enough to supplement relatively small Social Security earnings… due to physical inability and a lack of employment opportunities, counting on more years of earning an income doesn’t work,” (Business Insider).
Social security income saw a 2.8 percent increase in 2019, which was one of the biggest gains in the past seven years. However, this just translated into US$39 of extra income per month or just $1.28 per day. This obviously does not make much of a difference in the quality of life of the retirees. People who retire next year will get around US$17,500 annually as their pension, which is higher than the Federal Poverty Level (FPL) of US$12,060.
But the harsh fact is that the FPL is so ridiculously low that most economists do not actually use it to determine the true rate of poverty. Instead, the real poverty level is calculated by doubling the FPL. As such, the US$17,500 in pensions that retirees get from next year will be around US$6500 lower than the realistic poverty level of US$24,120 (doubling from US$12,060). The retirees will be left with no option but to downgrade their lifestyle and live frugally.
In March, the Government Accountability Office published a report revealing that almost 48 percent of older households had no retirement savings whatsoever, meaning that they don’t have a 401(k), IRA, or any other contribution plan. Social security has been one of the major discussion points in the upcoming elections. Some have proposed that payroll taxes be increased to ensure that the system remains stable. However, if the U.S. were to provide adequate retirement funds for the majority of Americans, payroll taxes would need to more than double from the current 12 to around 30 percent. Such a drastic tax increase would depress the economy, as working-class people would have less disposable income.
End of corporate pensions
If you are expecting the company you work for to send a monthly check when you retire, you might end up disappointed, as the practice is fast disappearing in America. “Nearly two-thirds of pension funds are considering dropping guaranteed benefits to new workers within the next five years… Despite gains in the stock market this year, U.S. pension plans are near their worst financial state in two years… Most U.S. companies no longer offer defined-benefit pensions, which typically provided guaranteed monthly payments to workers when they retired,” according to USA Today.
As of late 2019, an average pension fund only has 85 percent of the funds required to meet its obligations over time, a situation that has largely been created by the low-interest rates. Faced with difficult finances, several companies are either dropping or limiting their existing pension schemes. General Electric recently announced that they will be freezing pension benefits of more than 20,000 of its pensioners at current levels.