The mean average amount saved for retirement by all working-age families in the U.S. is just $95,776, according to a new report from the Economic Policy Institute. The median average – that is, the average for those in the 50th percentile – is just $5,000.
Most private-sector employees have “defined contribution” plans, such as 401(k) plans, which are self-directed. Employers typically provide matching funds, but if you don’t contribute, you get nothing. Which is why many have saved little or nothing.
In contrast, employees in the public sector often have “defined benefit” plans, which are traditional pension plans. Defined benefit plans, as the name implies, guarantee a set amount throughout a person’s retirement years.
Public vs. Private Sector Benefits
Only 32% of employees, including most government employees, have pension plans. But many of their plans are underfunded, even though the government has an obligation to pay the pensions of retired employees.
Government expansion has also been a factor. As the government payroll has expanded, so has the cost of paying pensions for retiring government employees.
In addition, compensation for government employees has increased at a faster rate than in the private sector. A 2016 study by the Cato Institute found that total compensation (wages plus benefits) for federal civilian employees averaged $123,160 in 2016 compared with the private-sector average of $69,901.
The value of benefits for federal employees averaged $36,795, compared with an average of just $11,175 in the private sector. In other words, benefits for federal employees are worth more than three times as much as benefits for private sector employees.
$7 Trillion in Unfunded Liabilities
Given the factors above, unfunded liabilities for federal, state and local pension funds now total $7 trillion, according to a report from Moody’s Investors Service.
Unfunded liabilities for pensions of state employees alone are projected to reach $1.75 trillion this fiscal year, according to a separate report from Moody’s. That’s up 40% from the 2015 fiscal year, because of “insufficient contributions” and underperformance. In addition, politicians sometimes borrow money from pension funds to meet their debt obligations. State pensions earned a median average of 0.52% in fiscal 2016, while their assumed average rate of return was 7.5%, according to Moody’s.
States Are Going Broke
Unfunded liabilities from pensions continue to rise and are perhaps the number one reason that many states are going broke. Consider a few recent headlines:
California – Illinois & California Ignore Massively Unfunded Pensions, But Pennsylvania & Michigan Take Action
Connecticut – Connecticut Gov. Signs Exec. Order Taking Over Spending After State Fails to Pass Budget
Illinois – Illinois on Brink of Becoming First State Rated Junk If Budget Crisis Not Averted
Maine – Maine to Begin Shutdown After Gov. LePage Says He Won’t Sign Budget Bill
Massachusetts – State Falls Short on Tax Revenue. Way Short. Again.
New Jersey – Christie Orders Government Shutdown amid Budget Impasse
New York – Building New York’s Next Budget Crisis
Massachusetts Among the Worst
Those of us who reside in Massachusetts can be thankful that we’re not residents of Illinois, but the Mercatus Center at George Mason University lumps Massachusetts with Kentucky, Illinois, New Jersey, and Connecticut as being among the five states in the worst fiscal condition because of low amounts of cash on hand and large debt obligations.
The Mercatus Center report notes that “High deficits and debt obligations in the forms of unfunded pensions and healthcare benefits continue to drive each state into fiscal peril. Each holds tens, if not hundreds, of billions of dollars in unfunded liabilities—constituting a significant risk to taxpayers in both the short and the long term.”
So how bad are things in Illinois? In case you think big government is necessary to help poor people, consider that Illinois is being sued for not paying its Medicaid bills.
“While it is no secret that as part of its collapse into the financial abyss, Illinois has accumulated $15 billion in unpaid bills,” Zero Hedge reported, “the state’s Medicaid recipients had had enough, and went to court asking a judge to order the state to speed up its payments. On Friday, the court ruled in their favor. The problem, of course, is that Illinois can no more afford to pay the outstanding Medicaid bills, than it can to pay any of its $14,711,351,943.90 in overdue bills as of June 30.”
The Overspending Epidemic
For perspective, consider that overspending is not just a bad habit for state government, municipal government or federal government. And it’s not just a bad habit in the U.S. Governments everywhere spend more than they take in, adding to their debt each year so than more and more money goes toward servicing the debt.
Taxes increase, but governments need more and more money to do less and less.
Consumers and corporations, like governments, are also spending money they don’t have. Total household debt in the U.S. reached $12.58 trillion at the end of 2016, bringing debt close to what it was during the financial crisis in 2009, according to the Federal Reserve Bank of New York.
When consumers spend money they don’t have, debt increases and they are unable to save adequately for retirement.
The world is $217,000,000,000,000 in debt and the average American has saved only $5,000 for retirement. It’s time to do something about it.