The U.S. retirement industry is fast becoming a one-trick pony, as defined benefit plans (DB) quickly disappear in favor of defined contribution plans. We, at KCS, have stated for a long time that asking untrained employees to fund, manage, and disperse a defined contribution retirement program is an incredibly difficult task that will likely lead to a social and economic disaster. Well, here is further proof that asking individuals to do this in today’s economic environment is increasingly challenging.
Despite “record low” unemployment (we seem to forget about the LPR at 62.7% and 95 million age-eligible workers on the sidelines), wage growth remains muted, and has recently fallen.
Furthermore, there is a certain level of income that is needed just to survive these days, and given the decades of modest real wage growth, we have a significant percentage of our citizens who just don’t have the disposable income needed to meet basic living expenses.
Furthermore, the following chart reflects some rethinking on the part of economists with regard to the actual level of disposable income in the U.S. and the effect of healthcare costs on this measure. Historically, healthcare costs have been considered discretionary, but in reality they are not. If one adjusts disposable income to reflect this observation, the percentage of debt to disposable income ratchets up significantly (see the chart below).
With wage growth lower and housing and healthcare costs rising, do most of our citizens really have the financial wherewithall to fund a retirement program?