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Editorial: Retirement Insecurity; A Looming Crisis for Younger People

To some extent, crises loom in the eye of the beholder. So when the economy came apart at the seams beginning in 2007, many members of the Baby Boom generation close to retirement believed that the sudden decline in their prospects constituted a crisis.

And for some of those people, the destruction of individual wealth in the Great Recession did indeed mean that plans to retire had to be deferred, sometimes indefinitely, because there wasn’t time to recoup their losses.

But as a new report by the nonpartisan Pew Charitable Trusts makes clear, the risk of downward mobility in the not-so-Golden Years falls most heavily not on so-called early boomers, those born between 1946 and 1955, but on younger generations for whom a secure retirement may be something only their parents and grandparents enjoyed. This is a looming crisis if ever there was one.

In fact, although it may come as a surprise to early boomers, the Pew study found that they are reaching retirement age in strong financial position, better than those who were born in the Depression and World War II eras at a comparable age.

The prospects are far less rosy for those born later. The report predicts that both late boomers, born between 1956 and 1965, and Gen-Xers, born between 1966 and 1975, will reach retirement age well short of being able to replace the 70 percent of pre-retirement income that financial planners say is needed for a secure retirement.

Gen-Xers took the biggest hit during the Great Recession, Pew says, losing 45 percent of their wealth, which was already at low levels, between 2007 and 2010. And although the economy has been slowly recovering, unemployment levels remain historically high and housing prices, while rebounding, remain far below their peak.

Compounding the situation is the fact that many young people are burdened by substantial student- and household debt and rising health-care costs, making it even tougher to save for retirement. Key to the devolving prospects for secure retirement is the fact that traditional defined-benefit pensions have largely disappeared, as employers have shifted the burden of saving and investing for retirement onto employees through the advent of defined contribution plans such as 401(k)s. The Washington Post reports that half of all American workers have no retirement savings plans through their employer, and four out of five private sector workers who do have plans at work have 401(k)s or the like. Research has frequently shown that such defined-contribution plans fall short when it comes to providing adequate retirement income.

In this context, the need for entitlement reform, a problem that preoccupies Washington, takes on a different appearance. Social Security and Medicare are twins pillars of a structure that over the years has sheltered millions of Americans in old age from the icy winds of poverty.

As The New York Times noted recently, most people 65 and older get two-thirds to all of their income from Social Security. The average monthly benefit is $1,268.

But because of changes being introduced under current law, such as raising the retirement age to 67, benefits are already shrinking, and research suggests that by 2030, Social Security will replace only 31 percent of the pre-retirement earnings of a typical retiree, as compared with 42 percent in 2004.

The trustees of Social Security reported recently that the program can pay full benefits until 2035, at which point it will be able to pay about three-fourths of promised benefits. So, as the Times noted, this is not an imminent crisis but rather a financial problem that can be fixed. But the fix cannot rely on reducing benefits. There are alternatives, such as raising the cap on wages subject to the Social Security tax, that can and should be adopted. Even then, that is not going to be enough to discharge society’s obligation to provide the financial mechanisms by which people can save and secure their old age against the vicissitudes of fortune. That will require more long-range thinking than either Congress or the Obama administration has yet displayed in addressing entitlement reform.