Do we really have a retirement crisis?

"Have we got a crisis, or merely a series of hard problems?" This question was posed at a recent panel discussion at the American Enterprise Institute (AEI) during a discussion of retirement readiness in the U.S.

During the past few years, a number of analysts and research institutions have published reports describing a looming retirement crisis. One review of several studies showed that between 29 percent and 70 percent of the U.S. population can't count on a secure retirement, depending on how that's measured. Another review cited 26 percent to 82 percent of the population at risk, again depending on the measure used.

However, panelists at the AEI gathering took issue with some of the more pessimistic measures, for example:

  • Some don't properly count distributions from retirement savings such as 401(k) plans and IRAs.
  • Experts disagree about how much income is enough to live comfortably and about the appropriate retirement age.
  • Some measures don't account for the value of home equity, which for many people is larger than their retirement savings.

Another key issue is how you define a crisis. Is it really a crisis if people who are fully capable of working must continue to work in their late 60s or early 70s to make ends meet? Or if they must wait to start Social Security benefits until their late 60s or age 70? Or if they're forced to accept a reduced living standard in retirement? Or if they need to downsize their home and cash in their home equity? Or if they have to take jobs that are "beneath" them?

Perhaps this situation merely represents a hard problem with unfortunate consequences, the result of a host of circumstances ranging from inadequate planning and saving for retirement to simple bad luck? Would these conditions be called a crisis by the boomers' grandparents, who as a group had shorter retirements and lower standards of living than boomers today?

Do these situations really require an increase in somebody else's taxes or reducing somebody else's Social Security benefits as they compete with other priorities for scarce federal budget dollars? That's the essence of any solution to inadequate retirement savings.

Earlier this year, the AEI published a detailed analysis of the various retirement readiness measures and presented evidence that the more optimistic measures may be more representative of the real retirement problem. But even so, roughly one-fourth of Americans are still at risk for an insecure retirement. People who fall into this group are typically lower-income, blue-collar workers; people with significant disabilities; and single, divorced or widowed women. These people may indeed face a real retirement crisis.

Possible methods to address these situations would be to provide a minimum Social Security retirement benefit for low-income, long-service workers, or to provide minimum benefits for impoverished widows or divorcees.

The AEI panel also suggested that the real looming crisis could be inadequate funding for both Social Security and state and local government pension systems. This could result in benefit reductions for people who are counting on these checks in retirement and would most likely include people in the vulnerable groups cited above.

Given today's political environment and the federal budget deficit, chances are very good that many middle-income workers won't be bailed out by the government. You may think that's unfair, but it's the most likely reality. Like it or not, these people will need to solve their own retirement crisis. The possible solutions include some combination of the following:

  • Save more for retirement.
  • Work as long as you can, including keeping your skills and contacts up to date as long as possible.
  • Reduce your living expenses to what you truly need and makes you happy.
  • Delay drawing down retirement savings and starting Social Security for as long as possible, to let those resources grow.
  • Learn what you can about effectively generating retirement income.
  • Be serious about improving your health.
  • Nurture a supportive network of family and friends to share burdens and care for each other in your later years.

Of course, for most people many of these solutions are easier said than done. Still, they represent the most realistic steps we can take.

And we all need to think about how much we're willing to give up collectively, either through increased taxes or reduced benefits, to help those who are truly vulnerable in their retirement years. This issue, while contentious, should be thoroughly debated in the coming election season.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.