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A Closer Look at America’s Retirement Crisis

Economist Teresa Ghilarducci says that 30% of middle-class Americans face living near poverty level when they retire, with many on an income of $20,000 or less.

Ghilarducci has served on the advisory board of the Pension Benefit Guaranty Corp. and authored several books on the subject of America’s retirement crisis.

How This Happened

In the 1980’s many business owners began to replace pensions with commercially based, individually directed savings systems—IRAs and 401(k)s. The fees for these types of plans are higher, which results in a savings of about 12% less than that in a lower fee plan.

However, many workers don’t even have access to such plans through their employer.

Contributing Factors

One contributor to the crisis is the fact that Americans are living longer than ever before, so they need more in their retirement account than they did in the 1950’s, when life expectancy was shorter.

Unfortunately, Americans are just not saving. Even those who have access to plans through their employer often don’t participate. Diane Oakley, executive director of the National Institute on Retirement Security, says about 40% of America’s workforce have nothing saved for retirement. Of those who do, about 60% probably won’t have enough.

How the Crisis Affects Small Businesses

Small businesses often procrastinate in the area of providing plans for their employees simply because the cost per worker is higher for them. Plans such as 401(k)s, for example, are fairly complicated and usually require help from a financial adviser, which charges a fee.

At any rate, small businesses are going to have a more difficult time holding on to good employees if they can’t offer some sort of retirement plan, as many of their best and brightest are simply going to leave them to go to work for the larger companies that do offer plans. Toby Scammell, the founder of Womply, goes so far as to argue that the retirement crisis could mean the end of the family business.

Effects on the Economy

According to the Social Security Administration, if no changes are made to the program, benefits will have to be cut 25% by 2033. AARP claims that this cut could cost 2.3 million jobs and $349 billion in economic output as retirees will have less to spend on goods and services.

If Congress does not act to protect the Social Security program, cuts will be made. If they are and Americans don’t save more for retirement to supplement this loss, America’s economy and her people are in for a rude awakening.

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