The Real Debt Crisis We Aren’t Talking About

I spent the day in San Jose, California yesterday, reporting on the city’s effort’s to come to grips with what Mayor Chuck Reed calls a “crisis” in the pension system that threatens the future of the town. At first sight, it seems strange that a town full of techies and which is home to companies like eBay and Adobe can’t afford to fill potholes or keep local libraries open full-time. But gold-plated city pensions are, according to the Mayor, the chief reason that this is the case. And the cut backs that are being made to afford them may actually result in greater economic bifurcation in the city, and higher tax rates for poor and middle class taxpayers, many of whom have little retirement savings themselves.

I’ll be blogging more about what’s happening on the ground in San Jose later in the week. But first, a bit of background on the real debt crisis in this country, the one that we haven’t talked about seriously yet, let alone come to terms with—the retirement crisis. The key stat you need to know: the median household retirement savings for all workers between the ages of 55 to 64 is $120,000. That works out to about $625 a month. A full one-third of the workforce aged 45 to 54 has saved nothing at all for retirement. At a time when social security benefits are being paired back, public pensions are being restructured en mass, and housing growth is flat (only the top 10 markets in the country are predicted to have any significant price increases in the next 15 years), this is a looming iceberg of a crisis.

Declining workforce participation numbers show how quickly the boomers are moving out of work, either by choice or force, and into a retirement in which more than half of them won’t match even 70 percent of their previous income levels. That has implications for everything from over U.S. consumption and GDP growth, to politics in the 2014 Congressional elections and the 2016 Presidential elections, in which boomers will increasingly face off against everyone else for a shrinking piece of the federal pie. (They will likely continue to fight necessary entitlement reform in large part because social security is the only thing most will have for retirement.)

The crisis can be split into two parts. First, the public pensions debacle, which involves only 10 percent of the American workforce, but has economic implications far beyond that, as pension entitlements tank entire cities, like Detroit. Second, there’s the private crisis—only 55 percent of private sector workers in America have access to any kind of formal savings plan, like a 401K. With large companies paring back benefits, and most job creation coming from small- and middle-sized companies that can’t or won’t offer such benefits, the stats will likely get worse in the next few years. California is in many ways ground zero for both the public and private portions of the crisis. Aside from Detroit, the largest public pension fights and biggest municipal bankruptcies have been in places like Stockton, Vallejo, and San Bernardino. Meanwhile, the state also has more retirees, young people without benefits, poor people, immigrants and small- or middle- sized companies than most states, meaning that it hits all the red buttons in terms of citizens who are most at risk in terms of retirement security.

Yet it’s also at the center of the most innovative new proposals about how to fix the crisis. San Jose Mayor Reed is pushing pension reform that would keep benefits that workers have earned but allow changes to benefits earned in the future, and force local politicians to raise a red flag if public pensions are at risk of being under-funded. (The failure to do that, and take responsibility early on, is a key reason many cities have gone bankrupt.)

Meanwhile, in the private sphere, Governor Jerry Brown signed the California Secure Choice Retirement Savings Program, developed by state senator Kevin de Leon, into law last year. This plan, which would be a state-run defined benefit program guaranteeing a minimum level of income for any private sector worker, will require everyone to put 3 percent of their income into a super conservative indexed fund. The idea would be to create a kind of substitute or add-on for social security. It’s getting huge push back from the financial industry (which doesn’t want to lose fees) as well as many conservative state politicians. But it’s already being copied in New York and Maryland. Illinois, Oregon, Washington, Connecticut and even Arizona are taking consultation on similar plans.

If successful, it would mark a sea change in the way we’ve thought about retirement, which everyone admits isn’t working. It would also mean a move back to a new kind of state-run program, very different from the huge entitlement systems of the past, but also different from the do-it-yourself, market knows best ethos of the 401K society that has left most people bereft. I will visit a variety of communities in California this week that reflect different aspects of the retirement crisis – look out for my blogs from San Jose, Stockton and L.A.