As Pennsylvania’s population grows older, more and more Commonwealth residents are approaching retirement age. But for many, retirement won’t be the dream of relaxation and adventure.
In the coming decades, a large number of Pennsylvanians over the age of 65 will not have the financial resources to continue to afford the basics of food, housing, and health care if they aren’t working.
Not only is that going to impact these individuals and their families, but it could impact every Pennsylvania taxpayer.
Is this just more gloom and doom about an aging population? Perhaps, but it’s also about fundamental compensation changes that have resulted in increasing income inequality.
Start with the demise of pension plans. The days of workers putting in 30 or 40 years with a company and retiring with a gold watch and a defined benefit pension paying a set amount each month for the rest of the worker’s life are almost gone.
Some professions (most often unionized workplaces) still have these benefits, but they are dwindling and changing for newly hired workers. Employers who offer any type of retirement benefit now often set up a 401k savings plan, where employees set aside a portion of their pay and the employer may or may not provide a matching contribution.
As we’ve seen by the wild fluctuations of the stock market in recent weeks, a 401(k) account involves risk to the individual. But the riskiest part of a 401(k) may be the voluntary nature of contributions.
Individuals and families with student debt, childcare costs, new mortgages, and other expenses are not likely to think about retirement income when they are trying to meet day-to-day needs, especially if they are self-employed or if their employer doesn’t offer a 401(k) plan.
According to both the Pew Charitable Trusts and AARP, about 2.1 million Pennsylvania workers aged 18 to 64 in the private sector work for businesses that do not offer any retirement plan.
But what about Social Security, the program that guarantees Americans a retirement income? Did you know the average Social Security benefit in January 2020 was $1,503 a month?
That’s a little over $24,000 a year – before Medicare premiums of $144.60 a month are deducted. The reality is anyone relying strictly on Social Security for their retirement income can barely keep their financial head above water.
If retirement savings patterns don’t change, the number of people without any source of income or savings outside of Social Security is likely to increase dramatically. That scenario will put significant pressure on public services for the elderly, particularly housing and long-term care. And no, the Pennsylvania lottery can’t cover those increased costs.
This isn’t just a Pennsylvania problem, as fundamental workplace changes are happening across the United States. Other states have begun programs to try to address the situation.
Oregon is the most advanced of this group, as the Oregon Saves initiative has been established to give employees without access to an employer-provided retirement savings program a way to save for retirement. Illinois, New York, and Maryland, among others, are in the process of establishing similar programs.
This kind of savings plan works like the 529 college savings program already in place in Pennsylvania. Individuals establish accounts and contribute through payroll deductions. The accounts are managed by a state government entity or an outside entity vetted by the state government. A key for the retirement accounts is the flexibility for employees to move to different jobs and carry their own account with them.
You might ask why this is needed – couldn’t individuals utilize an investment firm? They could – but they don’t. Surveys show workers with access to a workplace retirement savings plan will take advantage of it, but they will not take the initiative to save on their own.
The good news in Pennsylvania is there is movement to enact a state-sponsored retirement savings plan.
State Treasurer Joe Torsella convened a task force which produced a report recommending the establishment of a program in the Commonwealth and potential bipartisan sponsors in both the state House and Senate have circulated co-sponsorship memos.
While it’s true that nothing seems to move quickly in Harrisburg, it’s also true that the time for such an initiative is now.
As we face the challenges of our changing demographics, we need to try innovative approaches. A state-sponsored retirement savings program will give Pennsylvanians a chance to help themselves prepare for the financial realities of retirement in the 21st century.
Capital-Star Opinion contributor Ray E. Landis is the former outreach director for the AARP of Pennsylvania. His work appears biweekly.