Retirement nest egg isn’t enough for many people, expert says

Brookings Institution senior fellow Martin Baily discusses why retirement is at a crossroads and notes reverse mortgages could play a role

The impacts of the COVID-19 pandemic will be felt by those in or near retirement for years to come, exposing retirement issues that have been building for decades. Because of that, many of the traditional savings methods — including nest eggs — are not sufficient, according to Martin Baily, a senior fellow at the Brookings Institution and former chairman of the Council of Economic Advisers under President Bill Clinton.

“The retirement goal for previous generations was to have a secure pension lasting for as long as they lived,” Baily wrote in a column for Barron’s. “Today’s workers must now fend for themselves, relying on their own savings and figuring out how to avoid running out of money. With little fanfare, America has moved from a world of traditional pensions, where risks were absorbed by employers, to a system of individual accounts where families must manage uncertainty including the fact that none of us knows how long we will live and what large expenses we may face.”

These risks are slightly diminished by programs like Medicare and Social Security, but the lack of financial stability for these programs put American retirement issues into greater focus.

“The Social Security trust fund for retirement and survivors’ benefits is expected to run out of money in 2033, while the Medicare hospital fund could run out in 2028,” Baily wrote. “These dates are far too close for comfort. Congress likely will act to avoid sharp cuts in benefits, but no one knows exactly what will happen. While Congress should recognize how vital these programs are and bring stability to them, such support is far from guaranteed. Older Americans can now add policy uncertainty to their list of risks to retirement.”

Options do exist, however, including savings through individual accounts such as 401Ks or IRAs, and policy efforts should be revived regarding the marketplace for long-term care (LTC) insurance, Baily said.

Another option for older Americans is reverse mortgages, but that product is hampered by reputational issues and policy changes that have inflated the costs to borrowers.

“[Reverse mortgages] are now heavily regulated, and while this has mostly eliminated fraud and misrepresentation, it has also made policies expensive,” Baily wrote. “Regulation is necessary but needs to be simplified. Probably, reverse mortgages work best if they are small and can be used to pay off expenses like retiree credit-card debts, an obligation that has become all too common.”

Baily presented his findings on reverse mortgages at the Brookings Institution in 2019.

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