From the 1950s through the early 1980s, the personal saving rate, determined in the flow of funds accounts, was above or near ten percent (U.S. Department of Commerce’s Bureau of Economic Analysis). However, in the mid-1980s, the saving rate started to drop until it reached zero percent around the year 2000. Then, a funny thing happened. The recession hit in 2007 and Americans started saving again. Not as much as before, but just over five percent of disposable personal income. Some have said this increase was a necessary response to the shock felt by the recession and a new birth of financial responsibility. Others have said it was just a delay in purchasing some necessities and needed higher-priced items, like autos.
Regardless of the reason for more saving, it couldn’t come at a better time as the nation’s Baby Boomer generation has started to retire. Generally defined as Americans born in the years 1946 through 1964, the group encompasses approximately 80 million and the first Boomers reached age 65 last year. Every day now more than 10,000 Boomers turn age 65; this will keep happening every day for another 18 years.
Even though Americans have started to save again, according to Somnath Basu’s article, The Anatomy of the Boomer Retirement Market (www.fa-mag.com), Boomers are “woefully under-prepared for retirement”. Further, Somnath states, when referring to the first half of the Boomers, “this group of older boomers is totally clueless about what lies ahead after retirement. They seem to have little or no understanding about the funds required to maintain their lifestyles . . .”
Part of the older Boomer’s confusion could be due to the ever-changing landscape of retirement plans. For the first 20 years or so after passage of the Employee Retirement Income Security Act of 1974, traditional defined benefit pension plans were the norm. Employers funded these programs and long term employees looked forward to enjoying a healthy monthly pension check. Then the 401(k) plan started to take over. Employers figured out quickly that they could save money by shifting retirement funding from themselves to their employees by getting rid of their traditional pension plans and start endorsing employee-funded defined contribution plans with a 401(k) salary deferral feature.
Congress has gotten into the act as well. After initially cutting back the amount of salary that could be deferred into a 401(k) plan via the Tax Reform Act of 1986, cost-of-living adjustments have pushed the annual limit to $17,000, and those aged 50 or better can fund an additional “catch-up” contribution of $5,500 per year.
Despite the promise of Social Security benefits, it is now up to each American to save and fund as much of his retirement benefits as possible. If the recession has a silver lining it’s the realignment of financial priorities including a focus on savings. But a five percent saving rate is not enough; let’s get back to the ten percent-plus glory days of yesterday.
Jay H. Beltz is PBTK’s Pension Plan Services Practice Leader. Jay is a pension consultant with more than 25 years designing, administering and consulting on tax-qualified retirement programs like defined benefit plans and Section 401(k) plans. He has been involved in establishing and terminating more than 5,000 plans and continues to advise all sizes of employers about the tax and savings benefit of such programs for their employee’s financial well-being.