Retirement security: The current multi-generational crisis looking back at you.
Two-thirds of all Americans don’t contribute to retirement accounts like 401(K) available through their employer.
6 percent of millennials have a traditional pension plan.
13 percent of baby boomers have a traditional pension plan.
These are dire statistics that should shock us to take corrective actions both as individuals and as a society.
In the good ol’ days of the ’50s, ’60s and some ’70s if you worked for a company and you were loyal to that company, the company in return took care of you. The companies I’m talking about are the stewards of Industrial America. The Blue chip companies: The big 3 (GM, Ford, Chrysler), GE, Kodak, Xerox and can’t forget the Big Blue, IBM.
Fresh out of High School, Military service or college, anyone lucky enough to get a job at any of these companies was assured of a secure middle class lifestyle. A job for life, benefits for life, stability. For instance, if you worked for GM or any of its subsidiaries, you were accorded employee discount on your car purchase for life. This benefit was extended to some family members as well. In the Airline industry, retired employees could fly for free, anytime, anywhere in the world, as long as there were available seats.
When it came to retirement, the companies offered a lifetime pension based on factors like pay scale and length of employment. The company took on the responsibilities and risks of providing a secure retirement to its employees.
The generations that worked in the ’50s, ’60s and some ’70s had other personal values and skills. For instance, they were conscious of the effects of the great depressions and as such saved more of their incomes.
The chart below shows personal savings consistently about 10% of disposable income through the ’50s, ’60 and ‘70s
Towards the mid ’70s corporate expenses became burdensome and many companies started exploring ways to shed costs and the now all too familiar “outsourcing model” gained steam. Jobs were increasingly automated and outsourced and hence the once thriving industrial belt became the Rust Belt.
Retirement plans were “outsourced” into a new thing called 401(K).
In 1980 8% of private sector workers participated in 401(k) type plans only but by 2013 this had grown to 33%. By comparison 28% private sector workers participated in traditional pension plans in 1980 while only 2% participated in such plans by 2013. (Some companies offer both plan types and this has remained around 13% over the time period)
The demise of the traditional pension plan and the birth of the 401(K) plan shifted the responsibilities and risks from the employer to the employee. This meant one had to learn how to plan way ahead for the far off destination called RETIREMENT.
Baby boomers are the first generation to actively plan and manage their retirement. How terribly most of us failed at that!
Anyone who started working in the ’80s, ’90s and 2000s straight out of High School, Military service or college had the added burden of figuring out what to pick for a retirement portfolio. To make it doubly confusing you didn’t have to enroll for the benefit. Some people took to it easier than others. They enrolled in the plans, got the company match, went above and beyond by investing in IRAs, and managed them as best as they could. Such people are now sitting pretty. Others did not figure it out and they are facing uncertainty in their old age.
The generations that started working in the ’80s, ’90s and 2000s developed other personal values and skills. For instance, they were less conscious of their spending habits and as such saved less of their incomes.
The chart below shows personal savings consistently below 7% of disposable income through the ’80s, ’90s and 2000s
Anyone who started working in the ’80s and after has comparatively higher mortgage debt, credit cards debt, consumer loans, auto loans and student debt. This phenomenon has hurt our ability to save, enjoy vacations, enjoy family time, basically changed our lives and our economy.
For most of us it came to a head with the great recession. Most of those who lost jobs did not have anything to fall back on. Those who did not lose their jobs owed more in their homes than the homes were worth. Many people have not recovered and many may never recover. The economic crisis was a hard lesson on younger people but they are adjusting to a new normal. This still leaves those older than 50 in a bind more so in their retirement security.
How did we get here? It’s been both Macro: Technology, globalization and Micro: you name it. We do not have the skills our forbearers had. We spend more than we earn. We eat out more. We do not buy groceries anymore. We do not cook at home anymore. Entertainment has to cost us money otherwise we do not value it as entertainment. How many toys do kids nowadays need? How long do those toys last?
We are in an ever-changing world where jobs, careers, education, spending and investing are just parts of our lives being impacted by technology and globalization and we have to constantly reevaluate how we move forward.
Boomers and anyone in the “sandwich generation”: raising young kids and taking care of aging parents find themselves in a situation where they don’t have the time, money and energy to save money and plan for their own secure retirement. What will happen to them when they get older and more vulnerable to poverty and ill health?
The younger generations, working in a digital economy, increasingly find themselves vulnerable to automation. That programmer who worked at Microsoft for 10 years is now a “contractor” for the same company without job security. Soon machines will be doing his job and he is only 33 years old.
With a lot of uncertainty, a family life, buying a home and investing for the future get pushed back further and further.
Millennials are the first generation born into the self directed retirement accounts.
The retirement crisis we see now will be with us for a long foreseeable future.
Our wakeup call is now. As an individual, or a family, take the responsibilities and risks head-on. Learn from those facing the crisis now so you don’t have to be in their situation 20, or 30 years from now. He’s talking to you Gen X. He’s looking at you happy and gregarious millennial.
The digital economy is tough and unforgiving. The gig economy is full of uncertainty but your old age should not be. How many gigs can you string together to make a livable wage?
You can start taking care of this by being mindful of your career training, life skills, your consumption, and your debts.
Pay off your debt. While this sounds and feels like pain, denying oneself, it is a way to free you from burdensome monthly outlays. There is a nascent movement, a communal cleansing of sorts going on now where young people are shedding debt and encouraging each other to do likewise. This is a great way to shed a burdensome past for a refreshing future.
To ease the pain, you can start a small investing account. This will serve 2 purposes: you will learn about investing earlier on and you will also be motivated to shed bad habits and substitute them with good habits. There is nothing better than watching a small investment account grow. Keeps you fired up!
There are many tools online and offline to learn financial literacy and investing.
In the article “The simple Economics of Machine Intelligence” on the HBR, one sentence captured my attention. “All human activities can be described by five high-level components: data, prediction, judgment, action, and outcomes. (By Ajay Agrawal, Joshua Gans and Avi Goldfarb)
When it comes to retirement security each and everyone has to look at the data, (who you are, your circumstances, current retirement plans), predict (possible scenarios), make some judgments (what can be done, what should be done, what is acceptable), take actions (important: start a retirement account), and monitor outcomes (crucial: constantly reevaluate).
As a society we have to ensure that social safety nets like social security and Medicare are there for everyone. We have to reform the current retirement schemes like 401(K) among others to make them easier, cheaper and more accessible. We can make them opt out rather than opt in.
But by the end of it all you are ultimately responsible for your own retirement security.
