HealthyCal.org, February 7, 2012
Californians have less access to employer-sponsored retirement benefits than the rest of the nation, leaving a significant number of today’s workers at risk for serious economic hardship in retirement, recent research suggests.
More than 45 percent of workers aged 24-64 are at risk of serious economic hardship in retirement, according to a study released by the UC Berkeley Center for Labor Research and Education. This means low-income workers would have to delay retirement until age 84 and middle-income workers until age 75 to have a chance of avoiding poverty in retirement.
Social security wasn’t meant to be the sole support of the elderly, but other traditional supports for senior citizens, pensions and savings, are dwindling – putting older Californians at risk for poverty.
“If I didn’t have Social Security I definitely would have been homeless a long time ago,” said senior Margie Metzler.
Seven years ago, at age 60, Metzler was laid off from a non-profit job in Sacramento. Initially she got a job with the Gray Panthers helping people apply for Medicare.
“But it wasn’t enough to live on,” Metzler said.
At 62, she went on unemployment. “I plowed through my savings,” Metzler said.
The Social Security system was meant to keep people out of poverty in retirement. And that is what it is doing. Because of Social Security, poverty rates among retirees are a lot lower than the rest of the population.
But a healthy middle class retirement plan could be thought of as a three-legged stool. One leg would be social security, one would be employer-sponsored retirement benefits, and the final would be personal savings.
“That’s supposed to be the basis of at least the middle class, and it’s really fallen apart,” said Nari Rhee, one co-author of the study.
More than half of middle-class families have no savings whatsoever, according to a 2007 analysis. This leaves only two legs on many families’ retirement stool.
“Low-wage people are really on a pogo stick,” Rhee said.
Ninety percent of the money low-income retirees are living on comes from government-sponsored programs like Social Security and Supplemental Security Income (SSI).
But even middle-income retirees depend on Social Security for 70 percent of their income, a situation that pushes seniors into economic hardship in their later years.
“I’m retired, but I’m looking for a job,” Metzler said.
With technological advancement, older workers are becoming more obsolete and are forced into retirement, according to Teresa Ghilarducci, one co-author of the UC Berkeley study.
For the first time, older workers are a higher percentage of the long-term unemployed than younger workers.
“The idea that we can have a retirement policy that is based on work may not pan out,” Ghilarducci said.
Metzler didn’t think it would be hard to find a job because she has teaching credentials and years of experience working in tech support for companies. But when she walks into an interview with a group of young tech workers, she said, her years of experience can count against her.
“I could just see that they looked at me and thought ‘who wants to work with their grandmother?’” Metzler said. “I’ve never had that before.”
She’s tried to help other seniors improve their tech skills. “I like to refer to myself as the tech support to the senior community in Sacramento,” Metzler said.
But that work never pays, so she depends on the $1,300 a month she collects from Social Security. After paying her $865 rent, she doesn’t have much left to live on.
When her car was repossessed last summer she decided to move in with friends in San Jose who offered her their spare bedroom. Now she’s hoping to find a job in Silicon Valley and buy a car.
Metzler does have one other source of income, $300 a month from a pension she earned while working at Lockheed. The check is so small because she started collecting the pension at age 55, when she thought pensions were disappearing.
Metzler’s fear was not entirely unfounded. Access to pensions has been eroding throughout the country over the past generation. Employer provided retirement benefits can be broken into two categories: pension plans and individual account plans such as 401(k)s.
Retirees with a pension are guaranteed a certain amount every month until they die. Retirees with individual accounts like a 401(k) invest money in the stock market and have no guaranteed return.
Nari Rhee says the most surprising thing about the UC Berkeley Center for Labor Research and Education study was how few employers are offering any retirement benefits at all.
“Nearly half of Californian workers will wind up retiring in or near poverty level,” Rhee said.
Only half of Californians work in firms that offer a retirement plan and 44 percent of workers actually participate in a plan. There is also a large gap between the public and private sector. Most private sector workers only have access to a 401(k) type plan.
In 1980 accounting rules changed, requiring companies to claim the liabilities of the money they would have to pay to retirees on their balance sheets. This made pension funds risky to a company’s bottom line, triggering many firms to switch from pension plans to 401(k) type plans for new employees.
The problem is that with an individual account like a 401(k), employees take on all the risk. With the large pool of people in a pension plan, some retirees live longer and some die sooner, but the money managers are able to use an average life expectancy to estimate how much money they will need to pay retirees. However, if someone with a 401(k) lives longer than expected, they risk running out of money. On the other hand, any money that is left when they die can be passed on to their children or other survivors, unlike most defined benefit plans.
Teresa Ghilarducci also points out that the average employee doesn’t know how to make smart investments in the stock market, so they often make decisions that deplete their retirement fund, or have to pay financial planners to manage their investments.
While the main responsibility to fix any issues with social security or retirement programs falls to federal legislators, Ghilarducci says California is in a unique position to try new programs that could increase retirement security for the country.
“If something isn’t done we’ll have the biggest downward mobility since great depression,” Ghilarducci said.
Ghilarducci proposes an optional state-run pension plan called the California Guaranteed Retirement Account. Any worker who files a tax return could pay 5 percent of their income into the account through their paycheck and would be guaranteed a pension at the age they begin collecting Social Security. The plan would be provided by a large, prudently managed public pension fund like CalPERS or CalSTRS.
“Getting ordinary workers into a state plan makes all workers have access to the best money managers in the country,” Ghilarducci said.
She says the idea for a state-run pension fund has been around for about 10 years but no other state has tried it. “California legislators are the only ones with focus and vision enough to go forward with it,” Ghilarducci said.