Panel
Can America Afford to Retire?
- Future gaps between promised pension benefits and set-aside assets, as well as between Social Security revenues and payouts, are expected to widen in downside scenarios involving market deterioration or individual retirement during a downturn.
- Today's retirees are projected to be the wealthiest in history with rapidly growing incomes and assets, having seen poverty rates drop by approximately one-third over the past two decades, supported by retirement plan contributions that are roughly 30% higher relative to wages than in the 1970s.
- Defined contribution plans are anticipated to evolve to offer lifetime income, inflation protection, and longevity risk coverage similar to defined benefit plans, potentially through target date funds, auto-enrollment, and SECURE Act-inspired safe harbor annuities, though no solution can guarantee high incomes at low contributions without savings.
- Public employee retirement systems face funding challenges due to reliance on high assumed rates of return, with state and local plans expected to remain less funded than private sector pensions; CalPERS faces a potential 7% return target shortfall and an adjusted amortization period reducing the timeline from 30 to 20 years for unfunded liabilities.
- Specific state systems have distinct trajectories: CalPERS may utilize private equity strategies to exceed return targets and will receive a $3 billion contribution from Governor Newsom, while the Texas Teachers Retirement System aims to maintain an 80% funding ratio and implement legislation to address future contribution sharing.
- Policy and legislative actions are expected to significantly improve coverage via auto-enrollment and multi-employer plans, with Washington state adopting auto-enrollment for 457 plans, though small employers are projected to be the last to adopt new provisions due to readiness issues.
- Risk-sharing mechanisms in public sector plans may involve benefit adjustments based on fund performance, while governments might be compelled to reduce future benefits or redistribute risk to other stakeholders during funding crises, as evidenced by prior actions in Rhode Island.
- Financial literacy regarding decumulation and longevity is expected to be a struggle for participants, leading to tighter restrictions on hardship withdrawals and loans, with potential mandatory participation if liquidity needs prevent voluntary plan access.
- Social Security replacement rates for the lowest income quintile are projected to reach approximately 90% of pre-retirement earnings, supporting roughly 15% of Americans who rely on Social Security for the majority of their income, rather than the previously cited one-third.
- Implicit rates of return for institutional risk transfer products are estimated between 7% and 8.5% over 30 years, whereas the risk-free rate assumption for Social Security benefits is expected to be lower, and corporate pension liability disclosure is becoming more transparent due to recent accounting rule changes.
- The retirement system outlook includes a 30-year horizon for risk transfer product pricing and a 10-year trend where best value for pension plans starts with large employers and percolates to smaller ones, alongside a potential federal mandate requiring states to fully fund plans to prevent destabilization.