Financial Crisis in America essay
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This paper investigates a looming financial crisis in America for potential retirees. It establishes how safe it is to retire under the current systems of retirement strategies. According to literature, the two strategies for retirement as indicated in the movie were 401k style savings plan and lifetime pensions. However, people have persistently risen to a rude shock when they realize that while the health policies have considerably increased health expectancy, there is not enough savings to live the extra years. This paper gives a critical analysis of the literature in "Can You Afford to Retire?" and how the middle class is likely to be affected now and in the future (Krugman 311).
It is largely true that the working classes who are approaching retirement are at a risk of a great financial crisis. According to literature, anyone at this point of service must understand the essence of obtaining a stream of income from their pension. However, this would imply that they will be up and running looking for an annuity in a bid to get annual income. Generally, pensioners usually provide a range of rates that can essentially mean that one can get an ideal income by just taking time to shop around. For instance, the difference in rates offered in annuity can be as wide as 18%, thereby availing a system that can be adequately taken advantage of to receive incomes as high as $30,000. The pension providers basically make use of gilts to determine where to set the annuity rates at. For instance, a considerable fall in gilts has been noticed in the United Kingdom and has been attributed to the recent policy on quantitative easing that requires them pensioners to acquire relatively more gilts. It has significantly impacted on the pensioners as well as the potential retirees (Kothari 71).
The modern day middle-class American employee is at the brink of facing financial crisis upon retirement. The changing world of retirement has put a large number of Americans at a greater risk upon retirement because it is now apparent that the new system that corporations are embracing is less sustainable. Previously, corporate organizations used to put their employees on a lifetime pension plans. However, over two decades down the lane, corporations are fast changing into the 401(k) pension plan for their employees and letting go of the outdated lifetime pension plan (Krugman 311).
However, the new 401(k) pension plan is proving to be a very risky venture for employers. This is certainly because employees now have to incur much more of the cost as well as risk of having to save for retirement. This is exactly a stark contrast to the lifetime pension plan that was in place a few decades ago. This means that in the near future a middle-class American retiree will not be able to meet their day to day costs since it is evident enough that Americans are not saving enough for their retirement. Besides, corporations have become reluctant and stepped back and put much of the cost on their employees under the new 401K pension plan (Kothari 71).
This move by corporations has not only shifted the retirement burden to employees but also caused a great fear among many Americans on their predicament upon retiring from work, leave alone taking an early retirement begging the question: can afford to take a retirement? This situation is slowly growing into a crisis and in near future for instance, employees approaching the ages of sixty will not be able to have sufficient amount of money to guarantee them a good and secure retirement. Therefore, one is intrigued to ask themselves, “What really is the cause of this financial dilemma for retiree's?” “Who creates this predicament?” (Krugman 311)
Several reasons have been given about how the present middle-class American society got themselves into this fix. However, one outstanding reason is the adoption of corporate bankruptcy strategies by corporations that warrants employees to change their pension plan system form lifetime pension plan to the 401K pension plan which is, apparently, wholesomely funded by employees themselves. From the foregoing, it is clear that this type of pension plan is not only risky but unsustainable. This is because, employees have to give up a huge percentage of their monthly savings into their 401k retirement plan in order to meet the requirement. Corporations only fund a small portion compared to employees. However, only a few middle-class American employees are able to meet this requirement. The rest do not manage to save enough that can sustain them for long upon retirement before they run out of money (Kothari 71).
Another factor that is proving a fast catalyst to this looming crisis is the fact that companies are cutting down on their operational costs. Many corporations are faced with the challenges of rising costs of operations and hence they are trying to find means to reduce their expenses in order to stay on board. Apart from cutting down on employee’s salaries and wages, employers have narrowed down to employee's retirement benefits. Some corporations are even encouraging their employees to take early retirement in order to save their medical insurance for their retirement. They use this as a bait to entice their employee's who fall for it quite easily oblivious of the underlying risk (Krugman 311).
For quite long the middle-class American work force has been counting on the guaranteed pension plan. However, the changing trend in which corporations are fast dropping the old-fashioned system and adopting the 401K pension plan to their advantage has caught many off guard. A large number of employees are unaware of the new terms and conditions that apply to the new pension plan among other details. For example, many middle-class American employees would opt to retire early with the hope of a lifetime pension not knowing that they are on the new pension plan system that solely depends upon their contributions and a small contribution from their employers. In the end, for example, some employees get a shocker of their lives when they realize that part of their pension has been slashed by employers who are implementing the bankruptcy statute (Kothari 71).
Corporate restructuring which has consequently led to cut backs is also a contributor to the retirement financial crisis. Employers are fast adopting new terms and conditions of employment which also apply to retirement pension plans. Corporations are filing for and hence applying the bankruptcy laws which help them to get away with it at the peril of their employees. When things seem to get out of hand, corporations are swift to shift the burden of paying pensions to their employees through the pension plans insurers. However, research shows that corporations are underfunding the pension plans insurers (Krugman 311).
Lack of employer-sponsored retirement plan is also worsening the retirement plan financial crisis. Most corporations are only making a meager contribution to the 401k retirement pension plan which is largely funded by the employees themselves. This is contrary to the former lifetime pension plan which was employer funded. Now employees have to dig deep into their pockets and part with a huge percentage of their income in order to sufficiently save for their retirement pension plan (Kothari 71).
According to the literature available, employees can submit their contributions as per the payment plan to the 401k on the basis of pre or post tax. Either way, the tax contributions are tax differed or the accumulated compound interests delayed in order to reap maximum benefit after holding them for long periods under 401k plan. Right form 2006, there is a provision for employees to remit their contributions as direct deductions. Although this slightly differs from the structure of the Individual Retirement Annuity, they are basically the same in that they are both made on the basis of post-tax deductions. Nonetheless, the sponsors of the payment plan must make significant amendments to it in order to widen the range of options available for the workers as well as retirees (Krugman 311).
The provision for the pre-tax has always been that employees should not be obliged to pay federal income tax deductions on the part of their incomes that are deferred for purposes of the 401k plan. For instance, an employee with a salary of $50,000 who decides to differ $5,000 of his or her salary would have tax deductions made only on the remaining $ 45,000. According to the literature, this would constitute 25% of the savings of every single worker who has a pension plan if the employee in question remains within the 25% marginal tax bracket and that no legal adjustments were made. However, the employee would eventually pay the taxes on retirement when he or she begins to receive the payment plan. It is at this moment that financial gains made can be transformed at withdrawal into ordinary income (Kothari 71).In case an employee had made contributions on the basis of pre-tax deductions to the non-Roth account, the funds can be conjoint and added to the accrued benefits. The government has not put any insurance for assets that are held by the 401k plan like other financial institutions or banks do to their clients. This essentially causes considerable vulnerability on the clients who are citizens struggling with life after retirement. Nonetheless, the legal provision on bankruptcy gives a bit of reprieve to the people as they are sure that the institutions would not shut up due to bankruptcy before giving them an equivalent of their compensation (Krugman 311).
Generally, all employees put in place strict measures on withdrawals of the pre-tax contributions as long as one still remains in service or has not surpassed the age of 59 ½. If any deductions are to be allowed before this age, the amount withdrawn would be subjected to excise duty that is equivalent to 10% of the total contributions. However, a limit of is imposed on the possible deductions in accordance with Internal Revenue Code. According to research, this requirement discourages employees from investing in the retirement benefit schemes, thereby leaving them very vulnerable at retirement. Although these measures are aimed at helping working middle class to save for their retirements, they are never that rosy always. For instance, once one has retired the benefits begin to nosedive way too fast as the demands put on the savings are too many to suffice. Thus, employees end up in the same rat race at retirement without any hopes of reprieve.
A research conducted in 2000 suggested that the financial crisis has made things worse, especially for retirees who have not been investing in retirement plans. However, the extent of vulnerability greatly varied along racial lines, with blacks being the most vulnerable even as the economic crisis continued to bite in America. Most people in this bracket have been succumbing to stress-related illnesses because of uncertainty that has caught up with them in old age. The worst part is that most of them find the cost of living too expensive to afford and their funds too limited. For instance, the cost of housing has gone up by up to 20% while the cost of electricity has shot up by almost 12% since the onset of the financial crisis. This implies that the commodities that this group could easily afford when they were in full employment have gone way out of their reach. The real effects can be elucidated from the fact that their finances have tremendously gone down while the demands as well as the cost of the demands considerably skyrocketed. Yet still, this trend is not likely to reverse any time soon due to continued uncertainty in the American market (Kothari 71).
When one retires and they have a 401k, then the choice is usually pretty simple- roll the 401k over into a lifetime pension plan. There are some exceptions to the rule -under age 59 1/2 and if they hold employer stock- but usually that’s the way to go. What happens if a pension is involved? Pensions will typically pay one an income for the rest of his or her life and then pay their spouse half of the amount for the rest of her life. If they don’t choose the annuity option, then the only other choice is to take the lump sum option. The lump sum option will allow one to take a big chunk up front and then roll that over to a lifetime pension plan. One then is in control of how much you take per month as their retirement income.