Some states are just now awakening to a looming disaster. The looming disaster will build as millions of baby boomers retire without sufficient funds. Without sufficient funds to live, they will automatically fall into poverty. That will increase the need for more funding of safety net programs and stress municipal budgets even more.
Over approximately the last thirty years, larger corporations that provided retirement benefits have been steadily replacing those pensions with 401K individual savings plans, funded primarily by the employees. Nearly all companies later followed suit. Some kick in a share and some don’t.
During the last recession that began in 2008, unemployment rose dramatically and the long term unemployed began to tap their 401Ks, if they had one. Now millions have no funds or at least insufficient funds on which to retire when they can no longer work.
There isn’t much that can be done now to reduce the impending financial impact that will weigh heavily on municipal budgets. This should make clear the need for a funded universal retirement system that isn’t the sort of life ring current 401K’s are during recessions.
Currently, Social Security withholdings are held in non-compounding Treasury certificates yielding 2.75% interest. But, funds held in a compounding investment, instead of the interesting bearing Treasuries, would change the picture dramatically
Median personal income is $30,240 for all workers over age 15. Withholdings from paychecks for Social Security are 6.2%, or $156 per month. For purposes of this example, disregard the employer contribution of 6.2%
The employee 6.2% withholdings compounded at a 5% rate over a thirty year period would generate a $1,558,000.00 annuity for retirement. At a 2% return the annuity would pay out $2,597 per month over 20 more years. Now double all that for the employer’s share for $5,193 per month.
In today’s dollars that would help keep most retirees out of poverty and help prevent depleting municipal budgets.