All the Reform in the World Won’t Help Retirement Crisis
Retirement should be a time when you kick back and enjoy the good things in life. After all, you’ve been working for decades. It’s officially fun time. However, sadly, too many retirees in 2022 are finding themselves burdened not only with hyper-inflation, skyrocketing fuel prices, and more, but they also don’t have enough money to live on. It’s a growing problem in the U.S.
Fortunately, for some retired folks aged 62 and older who have been living in their home for decades and paying on the mortgage religiously, there’s a way to tap into all that equity they’ve been building up. It’s called a reverse mortgage and it can provide you with much needed cash in your golden years when you need it the most, especially if you find yourself having to pay for things like out-of-pocket medical expenses.
If approved, you can take your proceeds in one lump sum payment or you can take them in monthly installments. You can even use the proceeds as a line of credit. The choice is entirely yours and based on a face-to-face consult with your lender. You can find out how much of a reverse mortgage you qualify for based on this calculator.
But what if you don’t own a home? Or what if you were so busy working and raising a family, you forgot to plan for your financial future? According to a new report, despite the U.S. being the wealthiest country in the world, far too many of its citizens face the gloomy prospect of horrible financial strain and perhaps even poverty in their old age. That’s because they lack the financial resources required to support themselves once they officially stop working.
Say the financial experts, addressing this impending retirement crisis is going to require much “more ambition” than the U.S. Congress has yet to demonstrate.
Supplementing Your Income
Experts agree that the U.S. has never given enough consideration to the best way of encouraging people to supplement their monthly Social Security checks while setting aside enough funds for old age.
For the majority of the 20th century, the U.S. government left retirement planning up to employers who would offer lucrative pension benefits to workers who spent decades employed at the same firm. Today, an employee funded pension plan is not only a rarity, it is considered “a sort of gold standard in retirement security,” and a relic of a much more financially compassionate period in American history.
But the truth is, the traditional pension plan came about purely by accident. Wage and price controls implemented to combat spiking inflation during the Second World War forced businesses to compete for “scarce workers” by promising them retirement benefits said workers simply could not refuse.
These retirement perks would go on to become a fixture of union collective bargaining agreements. They were also carved into stone in the 1974 Employee Retirement Income Security Act. Even so, they never covered more than around two-fifths of workers employed in the private sector.
Relying On Company Pension is Never a Good Idea
Some financial experts agree that even if you’re lucky enough to be covered financially in retirement by your employer, a reliance on a company pension to guarantee a good income in your golden years has never been a good, solid idea. Why? People, especially aging Baby Boomers, are living longer than their companies. Plus, many employers “are poorly equipped to manage pension finances.”
Since the establishment of the 1974 Employee Retirement Income Security Act, it’s estimated that more than 140,000 businesses have put an end to their “defined-benefit pension plans.” Also, thousands more have transferred their doomed pension plans to the Pension Benefit Guaranty Corporation, a government connected insurer that, in the end, could be a real problem for the U.S. taxpayer since they are the ones picking up the bill.
Enter the 401(k) Plan
By the 1980s companies desperately needed an alternative to the traditional pension plan, and they managed to figure one out. Once again, it came about by accident. The U.S. Congress was said to have inserted new language into the existing tax code at line 401(k) which was engineered to allow executives the right to “defer taxes on certain types of compensation.”
Financial benefit consultants were able to be creative with the new tax law. In turn, they interpreted the new provision to allow retirement accounts for most if not all employees with company gains and contributions that would accrue tax-free until the money was eventually withdrawn upon retirement.
Employers would administer the plans while offering a variety of investment choices and also make a matching contribution. Company employers would be entrusted to make the serious decisions about how to go about saving. That said, they would bear all or most of the risk of too little savings accumulation.
The Problem with 401(k)s
The 401(k), which is regarded by some financial experts as a “slipshod agreement,” would pass muster if only it truly worked. But many say it doesn’t. The tax break on the employee contributions drastically favor the rich who are savvy enough to derive the maximum tax benefit.
It’s believed that more than a third of employees, which amounts to over 50 million workers, do not have access to a 401(k) or any other variety of defined contribution plan. Of the workers who do have access, almost one quarter of them choose not to participate in the program.
Many employees end up contributing too little and in both the short and long run realize poor returns. Some of these poor returns are due to high fees and the complex nature of managing your own finances.
Congressional Regulation Complication
Say the experts, Congress has made things even more complicated by introducing a variety of alternative savings plans like the Individual Retirement Account (IRA), the Roth IRA, the SEP, the SIMPLE IRA, and more. Once again, the main beneficiaries of these programs are the wealthy who are said to be able to “game the system.”
For instance, with the “backdoor Roth” IRA, you can work around the Roth IRA’s income limitations simply by transferring cash from other retirement accounts you might possess. Also, there are multi-million-dollar IRAs that some politicians exploit with thousands upon thousands of tiny contributions.
With all this in mind, legislators are said to be addressing the problems with regulations like the SECURE Act which was put into law in 2019. There is now a follow-up law currently being considered.
In theory, these new regulations are said to be seeking to enroll more workers automatically. They will also cover part-time employees, plus push more small businesses to offer 401(k) plans, along with encouraging the addition of annuities which are designed to assist retirees with making their money last for decades if necessary. These new proposed regulations are all designed with one thing in mind: to prevent retirees from falling into poverty.
But the one overriding question remains: are these new regulations worth it if they come with high fees and excessive red tape?
Some financial experts believe that the U.S. requires a simpler, yet more comprehensive approach towards providing a cushion for retirement. One such plan would include automatic enrollment in low-cost plans, universal health coverage, plus a variety of well curated investments which would also include a basket of cryptocurrencies.
The plan would also include “easy portability” if workers change jobs and/or careers, plus subsidies for those who receive low wages. Such a system, if it were to be passed into law, would minimize fees, cut red tape, reduce unnecessary risks, and even benefit businesses and the economy as a whole, or so some financial specialists agree.
But in the end, if these new laws actually get passed, retiring Americans would be able to breathe easier and actually enjoy their retirement instead of worrying over where their next dollar is coming from.
