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Photo: Joint Economic Committee, License: N/A

Household net worth declined during recession

Christine Chamberlain, a Clarks Summit resident who works in Medicare health-care administration, says that the secret to retirement planning is to keep the eye on the prize.
Her retirement plans included travel, cruises, and global exploration. However, these dreams suffered a disheartening setback when she lost her job due to outsourcing during the darkest days of the Great Recession.
“I was a corporate vice president, and it was a demeaning situation,” says Chamberlain. “Looking back, I was expecting it to happen, but it still hurt.”
Central to Chamberlain’s approach for retirement is the use of what she calls a “great accountant.” She says this individual never gives monetary advice, but is very skilled at detailing the pros and cons of comprehensive investment decisions that are available, along with the probable ramifications of certain choices.
Chamberlain maintains a varied portfolio, and admits to worrying as she monitors her revenue streams. The job loss, along with subsequent re-employment, has caused Chamberlain and her husband to rethink their retirement planning, and to deal with a nasty tax penalty.
“Years ago, we did not include Social Security payments in our retirement plans because of the fear that the whole program would eventually be bankrupt,” says Chamberlain. “However, because of financial realities, we now include Social Security in our forecast, but I still don’t feel good about our financial situation.”

Shaken security

Chamberlain’s story brings into focus a report authored by The Joint Economic Committee (JEC) of Congress, which is chaired by Sen. Bob Casey (D) Pennsylvania. Entitled “Retirement Security After the Great Recession: Middle-Income and Middle-Aged Americans Feeling the Squeeze,” the document warns that middle class retirement security was seriously shaken by the Great Recession.
The report advises, “Lawmakers should pursue a variety of policies to enhance retirement security, including enrolling participants automatically in Individual Retirement Accounts, promoting the purchase of financial products that provide guaranteed income for life, preserving favorable tax treatment for retirement savings for middle- and lower-income Americans, and protecting and strengthening Social Security for current and future generations of retirees.”
The approach JEC endorses also includes compounding retirement savings by protecting existing favorable tax treatment afforded to employer and employee contributions to retirement plans. Increased savings rates for employees of companies currently not offering employer-based pensions are also advocated.
The Joint Economic Committee offers other specific proposals that have caught the eye of some financial planners. These include the creation of Universal, Secure, and Adaptable Retirement Funds into which automatic payroll deductions could be deposited.

Lack of understanding

Financial experts from throughout northeastern Pennsylvania grimly report that most of the region’s citizens are not prepared for retirement. Ray Pilch, vice president and senior trust officer with the Honesdale National Bank, says, “I believe an entitlement mentality about the government rescuing us is at the root of most insufficient retirement planning,” says Pilch. “Yes, low-income people do have trouble saving, but many others spend everything they have after earning quite well. If you rely just on Social Security, especially with life expectancy up, it will be a train wreck.”
The shaky future of Medicare is another component of retirement planning that, according to Pilch, most people are quick to ignore. Even in its current mode of operation, Medicare leaves 20 percent of health-care costs, and with medical treatment becoming increasingly complex and expensive, a prolonged sickness can bankrupt a retirement plan.
“People often say that the government’s finances will somehow be fixed, but that’s just another denial,” adds Pilch. “People need to look at their retirement numbers, commit, and follow through now.”
Timothy Kearney, Ph.D., assistant professor and chair of the department of business at Misericordia University, warns that the vision of Social Security as a trust fund is a fallacy. In reality, Washington shuffles dollars in and out of the program, while peddling “propaganda” about the program’s security.
“Within 24 years, if system modifications are not made, Social Security will be forced to cut payments by 22 percent,” says Dr. Kearney.
He also warns that retirement prospects for many Americans have also been damaged by private pensions that were drastically under-funded. This has occurred at the same time life expectancy is growing, almost ensuring that a big group of older people will out-live their resources.
“In spite of these realities, many folks with 401(k) plans do not take full advantage of the match provision,” says Dr. Kearney. “They also maintain an insufficient diversification of their portfolio.”

Declining wealth

Lynn Evans, CFP, president and CEO of Northeastern Financial Consultants, agrees with Pilch that reliance on the government for retirement funding has increased because of a sense of entitlement.
“Virtually no one talks about their Social Security being less than their parents had, and I hear no concern over Medicare reductions or total loss of the program,” says Evans. “Part of this is because there is no alternative to Medicare in private insurance. Therefore, people choose to believe that Medicare will just continue.”
Evans also warns that many Baby Boomers have grown up believing that their parent’s fortune would eventually come to them through inheritance. In reality, nursing home care will largely drain these funds away, and there will be no inheritance to transfer, removing a perceived retirement cushion.
The Joint Economic Committee’s proposals for creation of universal IRA accounts are “fabulous,” according to Evans. She adds that success for this process would depend upon who is making the investment decisions, thereby making the inclusion of savvy administrators a vital necessity.
“The overall problem with all of these issues is lack of economic education,” says Evans. “This process should start in grade school, but most of us are learning the hard way for now.”