Another One-two Punch!

As expected, the U.S. Senate has passed legislation to effectively reverse an Obama-era DOL ruling that would have permitted employees to fund their retirements through an employer’s payroll system, and have those contributions managed in a state-sponsored system. Several states have already passed legislation to permit this action. The reversal of this ruling is likely to significantly reduce future consideration.

The DOL promulgated its rule, Savings Arrangements Established by States for Non-Governmental Employees, last year. It encouraged states to establish automatic enrollment, payroll deduction individual retirement accounts, known as auto-IRAs, for private-sector workers not covered by a workplace retirement plan.

There are roughly 55 million private sector employees (aged 16-64) that don’t have access to an employer-sponsored retirement plan.  The demise of the traditional defined benefit plan is bad enough, but compounding this issue is the lack of access to any retirement vehicle outside of an individual IRA, which restricts the owner of the IRA with a very modest annual contribution limit.

Couple the lack of access to an employer-sponsored retirement program with the growing dependence on Social Security, and it becomes easy to see the retirement crisis unfolding.  Nearly 60 million Americans are now collecting Social Security and for the fifth year in a row, the beneficiaries have had to settle for historically low increases.  In fact, the average recipient saw a $4 per month increase in their benefits for 2017.

Meanwhile, a new survey by The Senior Citizens League (TSCL) reveals that household budgets for older Americans were stretched by significantly rising medical and food costs. According to Mary Johnson, TSCL’s medical analyst stated, “over any retirement, our needs change. We require more medical services and prescription drugs, our need for different housing and supports like transportation services grow, and life events, like caregiving, or the death of a spouse, have a big impact on spending.”

According to the survey, the average monthly increase in expenditures dwarfed the annual increase in benefit growth by a factor of roughly 10 to 1. Unfortunately, the government continues to use the CPI for Urban Wage Earners and Clerical Workers (CPI-W), and not the CPI for the Elderly (CPI-E), which weights medical and food expenditures to a greater extent than the traditional CPI-W.

It is bad enough that our retirement system is failing the average American, but do we really need to exacerbate the situation by rendering life-saving Social Security benefits less effective? We can, and must, do better.

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