Danger zone: America's pension system breaks down

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In a special report published today, Eye on America: Retirement, CBS News examines how retirement is changing and how to prepare for the future.

About half of all US families have no money for retirement, according to the Federal Reserve data. Not a penny. But even this alarming savings deficit does not fully grasp the emerging socio-economic crisis, which is finally facing a rapidly graying nation.

This is because even Americans who are diligently preparing for their later years are falling behind and are being held back by a confusing patchwork system that limits the burden of saving for retirement to individuals. According to the Employee Benefit Research Institute (EBRI), only 18 percent of US employees say they are very confident that they have enough money to live comfortably in retirement years.

"What has happened in the past 20 or 30 years is a shift in risk from employer to employee," said Anthony Webb, senior research economist at the Boston College Center for Retirement Research.

Retirement Culture in Crisis: Is Congress Useless?

But shouldn't people take responsibility for planning their financial future? Yes and No Most of us know how important it is to live within our means, while millions of Americans are already converting part of their income into an employer sponsored 401 (k), IRA and other account to make sure that they have enough to live on in retirement.

However, millions of people find it difficult or impossible to save, primarily for reasons beyond their control. They are victims of numerous economic, social and other forces, ranging from high unemployment, stagnating income and rising health costs to the erosion of occupational safety and health and increasing income inequality. Behind these currents are, as always, political choices that we make as a nation, as well as deep-rooted special interests that control public order in a way that may not be in harmony with the common good.

The danger? In the coming years, a growing section of the U.S. population could see their standard of living decline as they retire – those who have lost something.

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63-year-old Hue Galloway is a typical example of the problems many people face in preparing for retirement, including those who have done their best to save.

The New Britain, Connecticut-based employee had both a 401 (k) and an IRA account and additional savings as a field engineer for TicketMaster. When the father of six children was fired in 2008 after more than a decade at the company, his income plummeted. He had been looking for work for more than three years but was unable to find a full-time job. A part-time job at a mailing company turned out to be fraudulent. Because he could not pay his mortgage, his house was closed.

At the time of his discharge, Galloway had a retirement account of approximately $ 130,000. He still had about $ 40,000 in a savings account, but he had to spend that money to make ends meet. Today he lives almost exclusively on social security, which amounts to $ 1,500 a month.

Compared to many Americans, Galloway is of course lucky – he worked for a company that offered retirement benefits. Robert Hiltonsmith, a policy analyst at Demos, a liberal think tank, estimated that in 2010 only 51 percent of private sector employees had access to company pensions. And that number drops 10 percentage points from a decade ago.

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Even more worrying is the lack of savings among retiring people: four out of ten Americans aged 55 to 64 have no money for retirement. For those in this age group who have a 401 (k), IRA, or other pension account, the median balance is $ 120,000, according to the Fed's latest consumer finance survey. That's not as much as it sounds – for the typical household, that's just $ 400 a month in income.

The average savings of all retirement households are only $ 40,000, far behind those that most retirees need, much less to maintain their standard of living.

And if families without pension are taken into account, the numbers look positive. According to the National Institute on Retirement Security, the median retirement account for all working age households in the United States is $ 3,000 and for nearly retired households is $ 12,000. Minorities are particularly at risk, the nonprofit research group found: three out of four black households and four out of five Latin American households have less than $ 10,000 in retirement assets.

"We are already in a crisis and it is getting worse," said Hiltonsmith.

401 (k): high cost, poor returns

By far the most common option for workers to retire nowadays is a job 401 (k) that has replaced pensions as the employer plan of choice for the past three decades. Here's the problem: As originally planned, 401 (k) plans weren't designed for that.

401 (k) plans, launched in 1978 as a small part of a major tax law, were designed to help well-paid executives protect income from taxes. Congress later decided to expand access to ordinary workers' plans, and even then the idea was that such investments should only supplement, not replace, ordinary pensions.

Critics point to a number of shortcomings in 401 (k) plans. According to some experts, the worst thing is that they require individuals to manage their investments and expose them to risks that lack the expertise to recognize them. This point was driven home during the financial crisis when millions of people saw the value of their 401 (k) holdings decrease.

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"The employees are neither equipped nor trained to deal with risks," said Webb.

Another strike is the high administrative, marketing, wealth management, and other fees that many financial companies charge for 401 (k) plans. Hiltonsmith calculates that such fees reduce a person's nest egg by an average of 30 percent. Webb is slightly lower, stating that an actively managed 401 (k) reduces retirees' assets by approximately 20 percent compared to a low-cost index fund.

Remarkably, higher fees do not lead to a better investment return.

"If the fees for actively managed funds led to better investment performance, these fees might be well spent," said Webb. "However, there is evidence that the fund, which is actively managed on average, is underperforming an index fund."

Although stocks soared to record highs this year and topped the 401 (k) balances, property prices remain well below their pre-bankruptcy levels. For most people, the value of their home is far more important to their retirement prospects than the development of the stock market. This is especially true in the United States, where the richest 10 percent of the population own more than 80 percent of the shares.

Moving from traditional pension plans to 401 (k) plans could partly explain why the United States tends to fare poorly in retirement provisioning compared to many other developed countries around the world.

Investment firm Natixis Global Asset Management, which manages more than $ 867 billion, recently researched in 150 countries which are best suited to securing retirement benefits and meeting pensioners' financial expectations. When reviewing health and health care, income and finance, and quality of life criteria, the company found that the United States was only 19th behind countries such as Israel and the Czech Republic (see the table below).

Complexity creates perplexity

However, insufficient savings and high investment costs are only part of the story. When preparing for retirement, Americans also have to find their way around a system that is incredibly complex.

Part of the difficulty lies in the type of retirement provision itself, which is far more complex than saving, for example, to buy a house or pay for college. Many variables include estimates of expected earnings at different career levels, assumptions about return on investment, estimates of the financial impact of having children, and – let's not forget – an idea of ​​how long you will live.

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At least in the public sector, there is social security that workers can count on when they retire. But even that requires a tricky calculation of when to start making payments, while the level of benefits depends on the unpredictability of politics and the federal budget. And social security benefits, which are generally thought to replace about a third of the income most retirees need, are not enough to fill gaps in private retirement savings alone.

In fact, about half of private sector workers have no access to any employer pension plans. And those who participate in a defined contribution plan face a confusing array of possible investments. Numerous surveys over the years have shown that most employees are unsure of the returns they will get on these assets, and at least until the disclosure requirements for 401 (k) plans have been tightened in the past year, largely in the dark about the often high levels Participate fees they pay.

"We've made saving so complicated, and that's a problem even for Americans trying to do the right thing," said Tracey Flaherty, senior vice president of government relations and pension strategy at Natixis Global Asset Management.

Spend less, save more?

Of course, cultural factors and individual judgment play a role in planning retirement. Although estimates differ on how much people should save, most experts say that a typical family needs to replace 75 to 85 percent of their early retirement income to maintain their standard of living after retirement.

But many Americans are simply not disciplined enough to save, Flaherty said, contrasting today's willingness to fund their lifestyle with the reluctance of previous generations to pay off debt.

"Saving is a bit of a diet," added Webb. "We all know how important it is to be good, but we don't want to be good yet."

On the other hand, given an epic financial crisis in which poverty has increased, income inequality has increased and many people no longer have a grip on the middle class, it is difficult to throw away money.

Why are wages important?

The real estate crash has affected real estate prices and affected the most important financial assets for the majority of pensioners. However, the biggest obstacle to storing money – one that was long before the financial crisis – is that almost all Americans' wages have stagnated for more than 30 years. This trend has continued after the real estate crash in the weakest recovery after the recession in US history.

In fact, people have been declining recently: Between 2009 and 2012, economists Emmanuel Saez and Thomas Piketty showed that the average income of nine out of ten U.S. households fell by almost 16 percent.

Should Americans be expected to work after 65?

"If you don't have enough left in your paycheck, you don't feel like you're putting something away," said Hiltonsmith.

Denise Oseni, a 40-year-old mother of three, from Alexandria, Virginia, can confirm this. As a high school teacher for sports, she says that she was unable to save money. Although Oseni once had a 403 (b) plan – a tax-saving savings account for people working in the public education sector – her school job forced her to pull the funds when she inherited her ex-husband's debts after the divorce , She also suffered a serious injury at school and had to cut her income by two thirds due to a state disability.

Oseni, hoping to get back to work, says she found it almost impossible to save when she raised two little boys and helped pay college for her eldest son. The admission of her older father, who cannot afford elderly care, has increased the financial burden.

"It's hard for me to figure out how to put money aside," she said, adding that paying for her house and covering other expenses takes priority over saving for retirement. "I'm not really able to save for retirement. I don't want to burden my children, but I want to be able to maintain my own household."

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According to the EBRI, the main reasons why employees don't put money away are the cost of living and running costs. Saving can be even more difficult for older people who have a disproportionately high proportion of long-term unemployed. Poverty among the elderly is widespread – according to the federal government, about 9 percent of Americans over the age of 65 are poor.

Many older people with low incomes also have health problems, which leads to higher medical costs. This often puts a further strain on retirement assets and can make it difficult for seniors to extend their working lives, which is the standard for retirees with insufficient savings today.

"High medical expenses, and especially long-term care costs, pose the greatest threat to the economic security of older Americans," said Richard Johnson, director of the Urban Institute's retirement program, a senate committee on aging last year.

In short, it's hard to save what you don't have. And the reality in the US today is that, like Oseni, dozens of millions of Americans are just struggling to get through. Journalist and tax expert David Cay Johnston notes that almost a third of the approximately 154 million Americans who had a job at any time in 2012 earned less than $ 15,000 a year.

Saving for retirement is a dream come true for the people in this group. And with so many people across the country living from paycheck to paycheck today, including a growing section of the middle class, it doesn't take long for the savings that people have put aside to evaporate are unemployed.

Better than it looks?

Not all retirement trends are bad. As women have entered the world of work en masse, their incomes have increased family income. It has also enabled more women to receive social security benefits and purchase their own 401 (k) accounts. In the meantime, retired people can be financially secure even without personal savings.

Americans in their fifties and sixties are also generally healthier and better educated than previous generations, which allows them to work longer and save more for retirement. And for some, today's retirement is an opportunity to realign their lives so that they like whether they are pursuing a second (or third) career, traveling, or just getting closer to the family.

"There has been a shift [and] The biggest problem has to do with retirement perception, "said Rebecca Hall, a consultant with Ameriprise, a financial planning firm." Now the conversation is: "When is the time when I can do something else?" Idea of ​​partial retirement. "

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Some experts also reject the assumption that Americans are actually facing a pension crisis. John Karl Scholz, an economist at the University of Wisconsin-Madison, argues that families consume more when children are at home, but consume less when children are out of the nest. Given the lower spending needs in recent years, he believes most people save enough.

As a result, Scholz believes that only a relative handful of U.S. households face a serious deficit in retirement assets.

"We believe that there is little evidence that Americans are badly preparing for retirement, at least for those born before 1954," he and his colleagues wrote in a much-quoted article from 2008. They were also confident that that "Americans … are reasonably preparing for retirement given the existing generosity in social security, medical care, and retirement planning."

The business owner changes her vision of retirement after setting up her own rules

Even experts who admit plans for 401 (k) have serious shortcomings stating that they are the only game in town. And of course not all plans are the same.

Brightscope, a provider of information and ratings on retirement plans, notes that some companies far outperform others in their funding contributions and other benefits, such as being exercisable immediately. The law firm Sullivan & Cromwell, the North American health management company Partners in Anaesthesia and the accounting giant Ernst & Young are among the US companies with the best 401 (k) plans.

Experts also say that the pension system can be improved. One idea is to introduce the type of retirement provision introduced by California in 2012 at the national level. The California Secure Choice Retirement Program is designed for low-income workers whose employers don't offer a plan. Employers must withhold 3 percent of it The salary of an employee with whom participants are automatically registered unless they log out. These funds are then invested in the state pension system or by a private fund manager.

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If a large part of the population is poorly prepared for retirement, many people with decent work and a decent income have managed to save enough money to make their lives relatively comfortable. This can be done (in part, using some of the strategies described in this CBS News Eye on America annuity series).

The problem is that yields below 401 (k) are just a symptom of profound inefficiencies in the American pension system – inefficiencies that big money policies are difficult to fix. Just one example: According to the Center for Budgetary and Political Priorities, the majority of the tax incentives for retirement savings go to the top 20 percent of income recipients. This means that most of the tax reliefs that premium savers receive go to the top people, even if they are the ones who need the most help down the income ladder to save in retirement.

It's not just unfair, the critics say – it's bad for the economy. "Ultimately, responsibility must be shared between employers, workers, and the government," said Hiltonsmith as he deciphered the additional risk that workers face.

For pensioners, these risks are not about arcane political arguments, but about survival.

"It's not convenient, but I'm getting it going," Galloway said of his current financial situation. Still, he added, "If I live more than 10 years, I will end up wiping out the savings."