The United States of America is the wealthiest and most prosperous nation that has ever existed, based on just about any definition of prosperity we can devise. For a large country like ours, most citizens are reasonably secure and well-off, or so we like to believe. If that’s true, then the words of Joe Hipsky, co-founder of an investment firm called iraLogix, may come as something of a shock. As Hipsky writes in this opinion piece just published in Newsweek, America may actually be heading for a major crisis that will affect our most vulnerable citizens – our seniors.
Through a combination of bad policy and insufficient personal planning, Hipsky argues that as a nation we are “sleepwalking toward a retirement crisis.” Take a look at his analysis and see if you agree. And here’s a hint: Rajiv Nagaich of AgingOptions does. He calls Hipsky’s view “an honest and probably the right analysis of our retirement future that people are not wanting to face up to.” Rajiv’s prediction: “Until there is a public cry, our politicians will simply refuse to act.”
An Impending Crisis of Retirement Affordability
“The COVID pandemic has brought to light some great changes and innovations,” Hipsky begins, but adds, “It has also shined a light on some not-so-great things.” The biggest issue, according to Hipsky, is that Americans live financially precarious lives. “Almost half don’t have enough saved to cover an unexpected bill, even less are saving for retirement.”
This would be less than ideal under normal circumstances, but these aren’t normal circumstances we’re living in. Hipsky notes that increases in the cost of health care, inflation, and a large population of aging adults is creating what he calls the “perfect storm.” He warns that many who think of themselves as middle class will find themselves falling into poverty without the right financial safety nets in place.
“The pandemic has exacerbated a looming retirement crisis; more than half of Americans have expressed concerns that they will not be able to afford retirement,” Hipsky writes. “Published reports say at least 20 percent of the population do not have any savings left for retirement or even emergencies.”
And older workers are bearing the brunt of it. “For the first time since 1973, unemployment among those 55 and over has surpassed those of mid-career professionals. Even before the pandemic, the median retirement account balance for households between 55 and 64 was $144,000, according to the Center for Retirement Research, a figure that would generate approximately $570 a month. That is not enough to live on,” Hipsky asserts, “and inflation isn’t helping.”
The Great Resignation
Unemployment is only part of the puzzle. The other part includes what has been called the “Great Resignation”, workers leaving their jobs at dizzying rates in 2021 to enter self-employment or gig work. “A record number of new businesses have been started as droves of employees have quit their jobs,” says Hipsky. “In the nervous adrenaline of starting a new venture, monthly retirement savings can shift to the bottom of the to-do list.”
Hipsky paints a bleak picture of these younger workers compared to the baby boom generation, especially contrasting their substandard grasp of financial fundamentals and their ability to afford housing in the future. “What’s more,” he says, “as millennials have fewer children, there will be even less support from new taxpayers for the retiring generation, further stressing an already shrinking base of taxpayers into Social Security.”
To make matters worse, access to financial advising is often exclusionary. Hipsky states, “For many, financial advisors will only pay attention to you and give you the best financial advice if you have an account of over $100,000 and in many cases $250,000 or more. Most Americans are simply excluded from the most effective retirement tools.”
Social Security as Social Contract
The upshot of all of this, according to Hipsky, is the overburdening—and eventual collapse—of Social Security, as the elderly increasingly rely on charity and the generosity of family in order to survive. And that isn’t just a problem for older adults. It’s a problem for everyone.
“Social Security was never intended to be the ‘Plan A’ and certainly not the only plan but a safety net,” Hipsky says. “At the same time, it is the responsibility of each individual to do their part to help maintain that safety net. That’s the social contract.”
To illustrate his point, Hipsky poignantly quotes 97-year-old former president Jimmy Carter, “The measure of a society is in how they treat their weakest and most helpless citizens.”
Repair Is Possible – But We Have to Act Fast!
Thankfully, Hipsky does provide us with good news. “Data suggests that a lack of savings is overwhelmingly habitual, not a capacity issue, and all of these problems are fixable within the framework that exists today. No reset button required.”
The fixes within the framework boil down to two things the government can do: first, “implement automatic retirement enrollment across the board.” Hipsky praises the actions of the few states that are leading the way in this, and cites the success that similar programs have had in other countries, such as New Zealand and Australia. “A uniform universal standard at the federal level would be ideal,” he says.
Hipsky believes that Americans want to save, because savings equal independence—something Americans deeply prize. But he adds that, “Studies show that while many will not take the initiative to start saving on their own, they are 15 times more likely to save for their retirement when provided with a payroll deduction savings plan at work.”
“Auto-enrollment provides the nudge that savers need,” he says, and in his op-ed piece he cites multiple studies that bear up this fact. But while he admits that auto-enrollment would go a long, long way to solving the problem, that’s not all Hipsky is asking of the government.
The second step he would like the government to take? Reform Social Security.
Social Security Reforms
For Hipsky, the prognosis is clear: “In its current form, Social Security will collapse. It is only a matter of time. This is an actuarial fact.” An increasing amount of payees and less and less payors, along with “no underlying market exposure to provide for growth or cost of living adjustments” makes the current Social Security framework fragile, but Hipsky believes that it doesn’t need to be taken apart – simply reinforced with stronger stuff.
“The solution here is to add an individual account for each taxpayer that is invested and managed on their behalf where, similar to Social Security, it can’t be accessed until retirement,” Hipsky suggests. “This can be funded by an expansion of FICA taxes, both to the individual and employer. As an employer, and if used only for this purpose, I would enthusiastically support it. This would further insulate people from emergencies where savings need to be tapped, like many just did over the past two years.”
Under this system, someone just entering the workforce today may not even need to tap into Social Security when they retire in forty years. According to Hipsky’s calculations, this would not only repair Social Security for good, “but it would also create a situation in which everybody truly has real skin in the game. Then a rising tide will actually raise all boats and leave no one under.”
Doing Nothing is the Only Wrong Answer
Hipsky’s article is meant to be “a wake-up call” to both retirees and the government, and his message is clear: this isn’t a problem that we can all collectively wish away. Social Security is groaning under the weight of the current framework, and it will fall eventually. It’s only a matter of time.
The pandemic has exposed how many Americans are standing on the edge of financial ruin. What happens next is up to all of us.
“In any event,” Hipsky concludes, “the government cannot stand idly by or continue kicking the can down the road; to avoid a retirement crisis and Social Security collapse, action is required now and the solutions are simple” He adds a sober warning: “The retirement crisis is not tomorrow’s problem; fixing it needs to start today.”
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(originally reported at www.newsweek.com)