Earlier this summer, Colorado PERA (PERA) reported to the Legislative Audit Committee of the Colorado General Assembly that its investment portfolio earned more than 12 percent in 2012, that its unfunded liability decreased by $800 million, and that a financial audit conducted by KPMG found no significant deficiencies or material weaknesses in PERA financial reporting or controls.
Also this summer, the National Institute on Retirement Security (NIRS) issued a report, The Retirement Savings Crisis: Is It Worse Than We Think? The report looks at retirement readiness of working Americans, including both those who have access to retirement accounts like pensions or 401(k)s, and those who don’t. Not surprisingly, the report concludes that the vast majority of Americans are unprepared for retirement. But the amount of that deficit—the difference between what most Americans will need for a basic retirement and what most Americans have saved—is alarming.
A few years ago, in 2010, PERA officials recognized that as a result of the Great Recession, its defined benefit plan was in a precarious financial condition. They worked with state legislative leaders and other stakeholders to craft legislation to put the plan back on track. The information PERA provided to the General Assembly’s Legislative Audit Committee shows the very earliest indicators that the 2010 legislation is beginning to work and that the shared sacrifices of employers, employees, and retirees have the plan headed in the right direction.
The NIRS report reveals that most Americans have not seen a similar turnaround in their retirement savings prospects. In fact, the report shows that most Americans have little to nothing saved for retirement.
Looking at data from the Federal Reserve’s Survey of Consumer Finances, the report analyzes retirement plan participation, savings, and overall assets of all U.S. households age 25 to 64, not just those with retirement account assets.
Most Americans without a pension or defined benefit plan, like the one PERA provides, are drastically unprepared for retirement. According to the report:
- More than 38 million working households in the U.S.—almost half (45 percent) of all American households —do not have anything saved for retirement.
- Among households approaching retirement (ages 55–64), the median retirement account balance was only $12,000. For all working-age households (ages 25–64) the median retirement account balance was only $3,000. In other words, the average U.S. working-age household has virtually no retirement savings.
- Of all working households in the U.S. between the ages of 25 and 64, 80 percent have less than their annual income saved in retirement accounts. Even for those approaching retirement (ages 55–64), 60 percent of working households still have less than one year of annual income in retirement savings.
- The total U.S. retirement savings deficit is estimated somewhere between $6.8 and $14 trillion. (These figures compare the total retirement assets of U.S. working households, ages 25–64, to recommended minimum retirement savings targets. The savings targets are based on household savings recommendations from Aon Hewitt, a large human resources consulting firm, and financial services provider Fidelity Investments. Both recommendations assume that workers will need to replace 85 percent of their retirement income and, with Aon Hewitt’s recommendation, that workers retire at age 65 or with Fidelity’s recommendation, at age 67.)
To put the $6.8 to $14 trillion gap in perspective, the current debt of the United States is more than $16 trillion.
It is hard to predict what the consequences of this national crisis will look like. For one, older Americans will continue to rely on Social Security as a primary source of income, even as national policy debates focus on proposals to reduce, rather than strengthen, Social Security benefits.
Poverty among seniors will continue, or even grow. As the report notes, data released by the U.S. Census Bureau indicated that, when medical expenses were taken into account, senior poverty was 15 percent in 2011—significantly higher than the standard poverty measure of 8.7 percent. Poverty among seniors has impacts far beyond the poor seniors themselves. Social services ranging from housing assistance to meeting basic food and medical needs face huge burdens as Baby Boomers stop working without the retirement savings they need. Families and communities will have to absorb these costs and consequences.
The 2010 legislation that returned PERA to a financially stable path required difficult sacrifices from employers, employees, and retirees. But as a result, public employees in Colorado have steady retirement income they can count on. Communities across Colorado can count on these retirement distributions too, as $300 million is infused into the Colorado economy each and every month.
But the challenge of providing for most Colorado seniors, those who do not have a defined benefit plan like PERA’s to rely on, will require more difficult policy discussions and maybe even some painful decisions down the road.