There are eight economic trends affecting retirement in the United States, according to John J. Kalamarides, head of Prudential Financial Full Service Solutions and CEO of Prudential Bank & Trust:
- Liquid asset poverty.
- Rising income volatility.
- Growing racial wealth gap.
- Growing educational debt.
- Delayed household formation.
- Increasing longevity.
- Lack of workplace retirements.
- Expanding 1099 economy.
Kalamarides discussed these with the Wilton Kiwanis Club during its Oct. 26 luncheon at the Wilton Episcopal and Presbyterian Church complex (WEPCO), and said unless something is done, these trends will cause “an enormous public policy issue for generations to come.”
Liquid asset poverty
Forty-two percent of American families are affected by liquid asset poverty, said Kalamarides, “which means they do not have access to cash or securities that they can sell quickly to cover three months’ worth of expenses.”
Liquid asset poverty is not dependent on income level — “high-net-income folks have just as much cash equity problems,” he said.
Income volatility
The second economic trend is rising income volatility.
“Cash flows for people earning below the poverty line are twice as volatile as those who are above the poverty line,” said Kalamarides. “This is a real issue.”
If a worker living below the poverty line gets injured, requiring his or her spouse to take time off work to take care of him or her, Kalamarides said, this leads to “enormous stress” and “unplanned income volatility.”
Racial wealth gap
The third economic trend deals with wealth, which has not grown for African-American and Latino families for the last 30 years, said Kalamarides.
“It’s largely been white Americans whose assets have grown,” he said.
Wealth refers to “the assets that they have, including homes and retirement plans,” said Kalamarides, and racial wealth gap is projected to be “only going to get worse” in the future.
Educational debt
The national savings rate during the Great Recession was minus 1% to minus 2%. Right after, it jumped to about 2%, said Kalamarides, and “young Americans started taking out educational debt.”
The rising use of educational debt, he said, is not only extending for 25- to 34-year-olds, but 45- to 54-year-olds and 55- to 64-year-olds as well.
Delayed household formation
The rate of homeownership among 25- to 29-year-olds, as well as 35- to 44-year-olds, is declining, said Kalamarides.
“This is because households were kicked out of their houses because of the mortgage crisis during the Great Recession, and they’re not going back and buying houses.”
Furthermore, Kalamarides said, “household formation — that is, people becoming heads of households and having children — is declining for 25- to 29-year-olds and slightly for 35- to 44-year-olds.”
"If you have educational debt and don’t have a full-time job, you put off getting married, owning a home and saving for retirement,” he said.
Increasing longevity
The seventh economic trend is that “people are living longer,” said Kalamarides.
There were 314 million Americans in 2012, and that number is projected to increase to 420 million in 2060.
“The population is both getting older and bigger,” said Kalamarides, “and when I do retirement planning for clients, I’m helping people think about 30 years of retirement — not just 20 years.”
Workplace retirement plans
Approximately 55 million people who work for small businesses with fewer than 100 employees don’t have access to workplace-based retirement plans, said Kalamarides.
“Access to workplace-based savings is important because saving at the workplace is the most efficient way to save,” he said. “You pay yourself first, you get the benefits of tax-deductible deferrals, it’s automatically deposited, you get the purchasing power of all the employees along the way, and there are all kinds of consumer protections for saving at the workplace as well.”
1099 jobs
The last trend is the growing number of 1099 jobs, which do not give workers access to benefits.
Since the Great Recession, said Kalamarides, there’s been an “enormous growth” in jobs performed by self-employed contractors or business owners as opposed to one of their employees, known as 1099 jobs.
People with 1099 jobs have to purchase their health care on the exchanges, said Kalamarides, and they don’t have access to traditional retirement plans.
Solutions
Kalamarides presented some potential solutions to these eight economic challenges, including expanding access to workplace savings and creating a “soon” savings vehicle.
One way to expand access to workplace savings, said Kalamarides, would be to “allow all the business owners to pool their purchasing power and offer one plan that’s common to all their employees.”
“Right now, the rules are you have to have common employees and you’re jointly liable,” he said. “But if we could make every person individually responsible and change the rules very slightly to allow small businesses to pool their purchasing power … that would be something dramatic.”
Not only are small business owners interested in this idea, said Kalamarides, but so are union laborers, AARP and the United States Chamber of Commerce.
Politicians on both sides of the aisle also support this, said Kalamarides, including Republicans Sen. Orrin Hatch and Speaker of the House Paul Ryan, Democrats Sen. Elizabeth Warren and President Barack Obama, and Independent Sen. Bernie Sanders.
“When was the last time you’ve heard of an issue that all those people are interested in?" asked Kalamarides.
To help people who need access to savings for emergency purposes, Kalamarides said, “Prudential and others have been talking about how [to] create a tax-neutral program that doesn’t increase tax deferrals or cost us more.”
“That’s exciting, and there’s bipartisan support of that as well,” he said.