Did you realize that more than 9,000 Americans reach the “retirement age” of 65 every day? And because people in general are living longer, healthier lives, they will need more money to survive. As more and more people join this demographic, the implications for federal funding programs, like Social Security, grow too. According to a recent article from The Business Journals, there are several ways that future retirement benefits might change in order to accommodate this growing population. Here’s a look at some of those predictions.
The end of employer-provided pensions.
The private sector has already started to move away from employer-sponsored defined benefit pension plans to defined contribution plans, like 401(k)s. For adults born in the 1940s and 50s, pensions covered approximately 30%. But for those born in the 1980s, only 11% have access to one, and that trend is expected to continue.
The rise of annuities.
Only 32% of U.S. workers are believed to be contributing to 401(k) plans, and many Americans are not saving retirement. Annuities are an alternative option that is growing in popularity. These financial products offer guaranteed income in retirement, often until death. Annuities that are offered within a 401(k) will be attractive to anyone who doesn’t want the responsibility of managing their own investment choices. According to the Indexed annuity Leadership Council, annuities are especially popular among millennials, and so many industry experts expect their use to increase. In times such as these (low, long-term bond rates) annuities can be expensive, but as the qualified plan annuity market matures, the prices are expected to become more affordable.
Taxing retirement contributions
Currently, the tax code allows people to save for retirement in pre-tax dollars, taxing them later when they withdraw that money. But many believe lawmakers will make big changes to this practice. With $7.3 trillion already in 401(k)-type plans and another $8.2 trillion in individual retirement accounts, it’s hard to believe lawmakers wouldn’t at least consider the windfall they would create if they could tax current contributions.
Growing Health Savings Accounts
An individual living in retirement for 20 years can expect to pay as much as $250,000 in health care costs. With the current taxing of retirement income, that’s a difficult expense to efficiently save for. It would be pretty encouraging for Americans to plan for health care costs in retirement if they could do so with tax-free dollars in vehicles like HSAs. Many municipalities already do this, so codifying the benefit and offering it to everyone isn’t a stretch.
70 is the new 65 in terms of Social Security benefits.
Previously, the retirement age to start collecting Social Security benefits was 65 years old. It has recently been raised to 66 for those born between 1943 and 1954 and 67 for those born in 1960 or later. Individuals can choose to collect earlier, for a reduced benefit (as young as 62) or wait until 70 to start collecting, in exchange for increased benefits. Many expect the Social Security Administration to raise the normal retirement age to 70 without the option to receive the increased benefits.
The rise of Multiple Employer Plans (MEPs)
Most Americans work for small companies. But because these companies pay much higher fees for retirement plans, only about 50% of those workers have access to a retirement plan. This problem could be solved if Washington revised the tax code to encourage MEPs, where companies join forces to get the same beneficial prices give to larger companies.
Obviously, no one can see the future, so only time will tell how Washington and the retirement industry will react to the growing number of retirees in our country. But it is believed by many that addressing the issues of longer life expectancy and lack in retirement savings could avoid a hefty societal burden, and therefore change is inevitable.
Written by Rachel Summit