Party Like It’s 2030
In 2030, America will be celebrating its biggest retirement party ever. For the first time, retirement-age citizens are expected to outnumber children.
The U.S. Census Bureau’s 2017 National Population Projections reports that all baby boomers will be older than age 65 by 2030, meaning that one in every five Americans will be retirement age.1 By 2035, the Census Bureau estimates, 78 million people will be age 65 or older compared to 76.4 million under age 18.
But the party may run out of steam before it gets started. The aging of the population may have profound impacts on retirement lifestyles as the growing number of older Americans further strains resources such as Social Security and Medicare. Those who will not reach retirement age until 2030 or thereabouts may be late to the party if they haven’t saved enough to hedge their bets against dwindling government resources for retirees.
As the population ages, the Census Bureau reports, the old-age dependency ratio, which is the ratio of older adults to working-age adults, is projected to climb. There will be about 3-1/2 working-age adults for every retirement-age person in 2020. In 40 years, the ratio is projectedto decline to 2-1/2 working-age adults for every retirement-age person. In 1940, the ratio was nearly 159.4 to one2.
That means fewer people paying into Social Security and more people drawing benefits. The Social Security Trust Fund for “old age” benefits, initially created to help provide the necessary funding as America’s population ages, is expected to be depleted by 2035. At that point, the government is expected to have only enough funds from Social Security taxes to pay approximately 75 percent of its benefit obligations under the program, according to the latest report from the Social Security Administration3.
Meanwhile, the trust fund for Medicare is also running out. For instance, the trust for Medicare Part A, which covers hospital costs for seniors, is anticipated to run dry by 2029, according to SSA. That means Medicare Part A would be able to pay 88 percent of expected benefits, falling to 81 percent by 2041.
Does that mean Social Security retirement benefits will be reduced or eliminated? Will Medicare as we know it cease to exist? No one can predict what may happen or what Congress may eventually do to remedy the burgeoning financial issues.
What financial advisors and retirement savers can do is prepare for the potential eventuality that they may have fewer government resources to rely upon. The traditional “three-legged stool” of retirement income, consisting of Social Security, pensions and retirement savings, is becoming increasingly wobbly.
Not to be a wet blanket -- but at the same time -- medical costs continue to rise. A 65-year-old couple retiring in 2017 will need an average of $275,000 in today’s dollars to cover medical expenses in retirement, according to Fidelity Benefits Consulting4. Those cost estimates apply to retirees eligible for Medicare and do not include potential costs for nursing home care.
These financial pressures put a premium on not only saving as much as possible for retirement but starting as soon as possible as well. Time and the power of compounding remain the best weapons available to slay the retirement funding dragon.
As an example5, let’s consider a 40-year-old making $60,000 a year who begins deferring 6 percent of his salary or $3,600 a year in a 401(k) plan. At 5 percent interest earnings, the retirement savings account will accumulate to $142,475 by age 67.
As a comparative example, a 30-year-old who earns $50,000 annually -- $10,000 a year less -- and begins deferring 6 percent of her salary or $3,000 a year in a 401(k) plan will accumulate $192,279 at age 67. That’s nearly $50,000 more with 10 more years of contributions and compounding.
If the 30-year-old saver gets really serious about saving and defers 10 percent a year, that total rises to $320,465 at retirement. Boosting the deferral further to 15 percent annually nets $480,698 at retirement or age 67. When it comes to compounding, time really is money.
There is no way to know what will eventually happen to retirees’ Social Security benefits or what Medicare will look like when 2030 rolls around. But given the current dynamics of an aging population and increasing pressure on senior social programs’ ability to sustain benefits without some sort of legislative modifications (increased taxes, reduced benefits or a combination of both), the smart money will err towards saving more, not less.
While the world may be a different place in 2030, financial advisors can help their clients plan for the worst while hoping for the best. In that way, 2030 could become not only the biggest but the longest party ever as millions of retirees celebrate a new miles.
E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).
1Older People Projected to Outnumber Children for First Time in U.S. History
March 13, 2018, United States Census Bureau, https://www.census.gov/newsroom/press-releases/2018/cb18-41-population-projections.html
2Social Security History, Social Security Administration, lhttps://www.ssa.gov/history/ratios.html
3Status Of The Social Security And Medicare Programs, Summary of the 2017 Annual Reports, https://www.ssa.gov/oact/trsum/
4Retiree health care costs continue to surge, Fidelity, Sept. 6, 2017, https://www.fidelity.com/viewpoints/retirement/retiree-health-costs-rise. Estimate based on a hypothetical couple retiring in 2017, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Estimates are calculated for "average" retirees, but may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies based on research and analysis by Fidelity Investments Benefits Consulting group and data from the Society of Actuaries, 2014.
5RetireSmart.com, retirement income calculator, https://www.massmutual.com/planning/calculators/retirement-calculator