RETIREMENT ALARM BELLS RINGING AGAIN
We recently posted some advice related to retirement planning and the need to take pen to paper (fingers to keyboard?) to make realistic assessments of future needs and available resources. And, because this is a divorce blog, we noted that the resources available may be halved or more by a divorce which may or may not be expected.
When starting this discussion the typical cornerstones of retirement are the “guaranteed” payments, viz., social security, defined benefit retirement plans and annuities. These are sources of funds which require only that you go to the mailbox (whether real or electronic) to harvest. In the past we have expressed concerns about pensions funded for Pennsylvania’s state and local government employees including its public school teachers. The Pension Fund Crisis is Starting to Boil (12/8/2022).
The good news is that in 2023 the Standard & Poor’s 500 Index of securities increased by 24%. The Russell 2000, a far broader index increased by just over 15%. Handsome returns typically make defined benefit retirement plans more sound; a good thing by any measure.
But, 2024 has brought a new crisis to the table; one that effects almost all Americans. Our national Presidential debate has taken on the subject of Social Security’s rickety status. We are reading that this crisis will become critical in 2035, just over a decade away. A Social Security bulletin issued in 2017 reported that a quarter of retired Americans are almost entirely dependent on these payments (90% of their income) and half of Americans who are retired count social security as half of their income. So, when we hear both political parties debating “cuts” to payments we all have reason to be very concerned.
Realize that the Social Security Administration has seen this coming and tried to fill the gap. In 2016 the maximum wage on which FICA tax was collected was $118,000. During both the Trump and Biden administrations, that maximum has taken off from the days when raises were either flat or close to the inflation rate. Today, you will pay 6.2% on your first $168,600 exposing another 50,000 to a tax it was exempt from eight years ago.
It’s a start but it’s not a solution. A big portion of the problem is demographic. Baby boomers are now ages 60-76 such that almost all are social security eligible. During that period American couples were producing 20-25 children per thousand in population. The arrival of birth control circa 1960 triggered a fast decline in that birth rate such that by 2020 we had 12 babies per 1,000. Another contributor to declining birth rates is the arrival of women in the labor force is large numbers. In 1965 just over half of people eligible to work were in the labor market; the other half were stay at home mom’s raising baby boom children. The number of people employed steadily rose to 67% in the Spring, 2000 but then began a fairly relentless decline until 2015 when it was at 63%. Today we have a full employment economy with a half century low in the unemployment rate. Meanwhile, the current participation rate is 62.5%. In 2015 the unemployment rate stood at 5.6%. Today it is 3.9%. Thus, we have a 30% decline in unemployment, yet labor participation is essentially the same. In short our labor force is declining in an arithmetic way while we have many eligible adults who have chosen not to “participate” in remunerative employment.
What this means for “us” is that we have fewer and fewer people paying into the system and a big part of America’s angst today is the reality that people ages 20-40 are having a challenging time finding their employment to be self sustaining. Last November USA Today reported that 65% of adult children ages 22-40 are getting some support from their parents. If we look at adult children in their early thirties (30-34) that number declines to 34%. What we hear from older clients is that their children are underemployed or earning less than needed to sustain themselves.
According to the Government Accounting Office while high income families saw huge increases in retirement balances between 2007 and 2019 the middle income quintile (1/5) saw a roughly 30% reduction in their retirement assets. The obvious impact is to put more pressure on social security to provide for basic needs.
Two other areas of concern merit discussion. Lots of Pennsylvania residents work for state and local governments. Many of them are participants in the defined benefit plan operated by PSERS, the state retirement system. As noted in our December 2022 blog (see below) only 64% of what is needed to pay those pensions is “in the bank” in terms of invested assets. A robust stock market in 2023 did slightly improve that percentage but the unfunded balance is $68 billion- roughly $13,000 per Pennsylvania household. These are contractual obligations by our governments and the likely result if this gap is not filled is for state and local taxes to be increased to cover the shortage. You know where that money will come from if you have a job or own real estate.
The other source we discussed at the outset were annuities. These are effectively defined benefit plans that promise regular payments for life in exchange for a cash deposit up front. We have seen an increase in the marketing of these products in recent years, especially in the days when bank deposits and other fixed income investments were offering very low yields. Annuities offer the comfort of not having to watch the market every day to see whether your retirement assets are up or down. But, historically annuities have relied heavily upon rents from commercial real estate to keep the income due to the annuitants (you) flowing. The retail mall market has been suffering for years and the pandemic has caused the office building market to sputter. In 2019 6% of Americans worked from home. Forbes reports that in 2023 that number has doubled to 12.7%. Meanwhile 28% have a hybrid work arrangement where they work partially from home and partially in an office. Employers are re-thinking whether they want to rent full time offices for people who are only occupying them 2-4 days a week. As leases come up, commercial landlords know they will be confronted with either demand for smaller space or lower rents. If shopping for an annuity product you probably need to ask what’s inside the portfolio that is supposed to be providing your income for life.
Lots has changed in four years. Things like the pension and social security shortfalls have been on the horizon for a long time without much progress toward solution. Those trains are now visible in the tunnel and the bedrock investments in shopping malls and office space that long sustained the annuity business and banks like New York Community are looking a bit tarnished these days.
Not good news. But, at least the S&P500 is up 8% so far this year.
