U.S. pension promises will go unmet without sweeping reforms

This year, anybody receiving an annual statement from America’s mighty social security system might notice a tiny ticking time bomb — if they possess sharp eyes.

Tucked into a footnote is a website link that explains that the two funds in this system — called “Disability Insurance” and “Old Age and Survivors Insurance” — have $2.9tn to plug the shortfall between expected payouts and what is gathered each year from payroll taxes. Those trillions sound soothingly big. But they are projected to run out in 2034.

The website cheerfully points out that the system has “reached the brink of depletion of asset reserves” in the past. In both 1977 and 1983 Congress had to come to the rescue.

It also notes that “even if legislative changes are not made before 2034, we’ll still be able to pay 78 per cent of each benefit due.” This is presumably meant to sound reassuring. However, the underlying message is not: if Congress does not act in the next decade, the government’s pension promises will be subject to a partial default.

Does this matter? Not for everyone. An American couple currently in their sixties with an annual salary of a third of a million dollars, say, will get a putative $60,000 a year under the current system, according to a handy calculator provided by the AARP. This is not to be sneezed at. But it pales in comparison to the income that wealthier Americans typically earn from assets and/or 401K retirement accounts.

The Center for Retirement Research at Boston College calculates that half of all Americans are “at risk” of falling short of the savings they will need to retire with the same living standards. Meanwhile a report from PwC suggests a quarter have absolutely no retirement savings at all.

Source: FT Adviser