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America’s Looming Pension Shock

After decades of gains, millions of Americans are slipping into poverty just as they near retirement age. The result will be a crisis for governments — one that they should be thinking about now.

At a recent Governing Leadership Forum in Lansing, Michigan Budget Director John Nixon told a packed room about Gov. Rick Snyder's plans to overhaul his state's public-pension system. Michigan's governor is, of course, far from alone in trying to deal with the public sector's pension crisis. State and local elected officials across the country are moving ever more boldly and aggressively to rein in pension costs, cutting benefits and increasing employee contributions.

But Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School in New York City and author of "When I'm Sixty-Four: the Plot against Pensions and the Plan to Save Them," would tell these government leaders that cuts in government workers' pension benefits are contributing to another impending crisis that they should begin to think about.

The poverty rate for people over age 65 dropped dramatically over the last several decades. Today it is the lowest of any age group, at about 9 percent. The aged vote, and so they drove the creation of a system of programs that lifted them out of poverty. That system has virtually disintegrated, but we have not yet felt the shock. We will.

In just 10 years, from 2010 to 2020, the number of people over 65 years of age will have increased by more than 14 million, from 40.2 million to 54.8 million, and in another 10 years it will increase to 72 million. Older workers near retirement lost 25 percent of their assets in the financial crisis. They're coming into retirement with lots of debt — mortgages, credit cards, even student loans — and with lower-than-anticipated levels of income. Their ability to save has been diminished. The U.S. Census Bureau's Survey of Income and Program Participation forecasts that when current workers ages 50?64 reach age 65, over 48 percent will be poor or near-poor.

And while many public-sector workers are seeing their pensions being cut back dramatically, about half of private-sector workers have no pension at all. Tens of thousands of older workers are taking Social Security early — foregoing a substantial portion of their maximum benefit — because they've lost their jobs and cannot find employment.

The net result of all this is a looming crisis for state and local governments, both because of the declines in tax revenue resulting from lower incomes as well as the fact that poor people put far more demands on government services than the non-poor. In addition, the creation of a vast new class of formerly middle-class, now poor, elderly will bring with it significant political and social instability.

To begin addressing this crisis, Ghilarducci proposes the creation of Guaranteed Retirement Accounts. GRAs are a pension-reform model for individual retirement accounts to supplement Social Security and savings. As a cash-balance plan — a hybrid of the traditional defined-benefit pension and a 401(k)-style defined-contribution plan — contributions and investment earnings would accumulate in either a state or federal fund, professionally managed like any large, pooled pension fund. Since GRAs would take advantage of existing financial infrastructure and would be funded by employees and employers, there would be only minimal costs for governments to implement them.

Smart public officials like John Nixon need to begin to consider the ramifications of the coming steep decline in the standard of living of millions of older constituents. The group with the highest poverty rate today is children. They cannot influence public policy. Seniors can and will. Thinking through Ghilarducci's proposal might be a good place to start.

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