Good news or bad news?

An article by an annuity salesman in a professional publication referred to the "Perfect Storm" which seniors are facing. A combination of financial pressures on Social Security, failing corporate pension plans, lower benefits for larger numbers of workers, lower interest rates on conservative savings plans, falling stock prices, rising inflation and longer life expectancies due to medical innovations are predicted to lead to severe financial shortfalls for those expecting to retire. Similar consequences are discussed in an article in Business Week (Jan. 31, 2005) which states that similar problems exist in most major counties of the world.

The author of the article about the perfect storm seems to believe the best solution to his dire prediction is to buy an annuity from him. I've been watching the professional literature of insurance agents and financial planners (no; I don't sell any insurance or securities) and the insurance companies are competing aggressively for agents by offering enticingly higher and higher commissions.  I used to be a financial executive for an insurance company and I know that when the company offers higher commissions, it's the customer who pays those commissions.  So I have to take issue with the insurance salesman even though I found his analogy to the movie, The Perfect Storm, to be interesting.

But the Business Week article did suggest some shelter from the storm.

Basically, the solution to all of these dire predictions is for more seniors to work a few more years and to then continue to work part time as long as their health permits. When the U.S. Social Security system was started in 1935, the average life expectancy was about age 65.5. Thus, the average retiree could expect to live a full year and a half after he quit working. In addition, there were more than 40 working people contributing a small amount to the system so that a few people could have a modest retirement income -- but not one that was comparable to what they had been earning.

But medical innovations and prosperity changed the statistics and the expectations of (almost) everyone in the U.S.  We were living longer and retiring earlier. Year after year, the U.S. Congress increased the benefits available to the beneficiaries of the system -- with absolutely no regard to whether the taxes being collected for future benefits were even remotely connected with the benefits being paid or promised. Corporations were under intense pressure from unions to increase retirement benefits. Since most of the corporation's competitors were subject to the same pressures, most of the large corporations capitulated and agreed to provide more and more generous benefits. But as these corporations become subject to price competition from foreign companies that were not obligated to pay the same wages and benefits, it became more and more difficult for the U.S. companies to set aside the money necessary to fund their promised future benefits.

During the last 25 years of the 20th century, many Social Security beneficiaries were able to live comfortably on their SS benefits without any other sources of income. Those who had some corporate retirement benefits and personal savings were able to enjoy a lifestyle that was actually better than during most of their working years. They could afford to travel -- which is one of the most expensive luxuries we can enjoy.  Many retired couples who had enjoyed a modest lifestyle during their working years were able to invest in vacation condos or a home at the lake.

Those of us who were still working saw how well many of our retired parents were doing and assumed we would somehow do even better. But instead of forty or more people paying a small amount to support one person who was retired, by the end of the 20th century, there were two or three retired people for every working person. Social security taxes had reached the point where they consumed more of our earnings than income taxes. Corporations had been making generous promises of incredible retirement benefits for their workers and were beginning to discover that they could not continue to fund these promised benefits in the face of a growing trend toward global competition.

The real problem is not that we can't afford more and better retirement benefits than in the early part of the 20th century. It's that our expectations have grown far, far beyond what is reasonable. It just isn't reasonable or possible (on a long term basis) for two or three workers to pay enough taxes to support a person who is totally retired.

What are the alternatives?

An obvious choice is that the benefits that have been promised by politicians and corporate employers can be cut.  But political pressure is being exerted by those who are unable or unwilling to accept the harsh fact that politicians lie and corporate employers are often unable to resist the demands of their employees when they aren't faced with imminent competition from companies that do not offer lush benefits to their employees. As a practical matter, benefit cuts won't happen until it is a case or all or nothing. That is precisely what is now happening with a number of large corporate pension plans.

A second choice is to pay more taxes for Social Security and to contribute more of our earnings for retirement savings.  But this is a choice that is limited to the more affluent members of our society. Most likely, the government will increases taxes on earnings but it won't be enough to overcome the excessive past increases in promised benefits.

The third alternative is for more people to work a few more years on a full time basis and to continue to have some sort of part time income as long as they are able to work. To a large extent this is already happening in the U.S. Finding work is a problem for some retired workers who have limited skills or skills that are not in great demand in our fast changing economy. But there are an abundance of continuing education institutions available and many other kinds of skill training. The Internet has made it possible for a lot of people to work part time from their home.  The amount of retirement income is not nearly as important as just continuing to generate some income to supplement the retirement benefits. When we are working, we don't have nearly as much time to spend money as when we are totally retired and bored to tears.

One of the advantages of working after we are getting Social Security and other retirement benefits is that we can afford to quit a job that doesn't offer some degree of personal satisfaction. We can try out different kinds of work until we find something that engages us for the time that we are there.  We can focus on doing something to help others (for pay) rather than just working to pay the bills.

The only thing standing in our way is the heavy burden of unsatisfied expectations. We can be bitter and mad about promises that have been broken due to the excessive enthusiasm of years past or we can enjoy the opportunity to be productive in ways that are personally fulfilling and helpful to others.

The best shelter from the "Perfect Storm" of retirement is to ignore the doom sayers and enjoy the opportunity to be a productive person for as long as your heath permits you to contribute.

At least, that's my humble opinion.

Vern Jacobs
Treasurer
Positive Lights, Inc.