Retirement insecurity

The top worry of our poll respondents is the health of Social Security; 88 percent called the issue important or very important. It most likely looms large because of the increasing fragility of other sources of retirement income. Only about half of working Americans are enrolled in a pension or 401(k) plan. Americans have lost as much as $2 trillion in retirement savings over the past year and a half. In our survey, 52 percent of respondents ages 55 to 64 said they lost retirement savings in the market drop. For those in or near retirement, there is little time to recoup their lost nest eggs, making Social Security that much more important.

Social Security is safe now, but by 2041 payroll taxes will cover only 78 percent of money paid out to beneficiaries. Congress might decide to raise the eligibility age, which it has done in the past, as well as cut benefits for those not yet retired or raise taxes on high-wage workers.

Pensions and retirement accounts are the other main sources of retirement income. Eighty-five percent of our poll respondents said they want those protected from financial institutions going bust. Their concern is valid. Some companies have reduced or suspended their contributions to 401(k) plans, as General Motors did for its salaried workers in October, and some corporate and public pensions look increasingly shaky.

According to an October analysis of the largest 500 companies in the U.S. by ratings agency Standard and Poor's, pensions are "on the way to reporting the largest underfunding in history," worse than the $219 billion in underfunding reported during the last bear market, in 2002. A separate analysis of the same 500 companies by Goldman Sachs in October showed that 18 employers, including General Motors, U.S. Steel, and Boeing, have pension obligations that exceed the value of the companies. ExxonMobil, Johnson & Johnson, and two others were underfunded by at least $1 billion. Some pensions were taking undue risk with their money, with 11 of the largest U.S. companies investing 80 percent or more of their pension plans in stocks, the Goldman Sachs report notes.

When corporate pensions can't meet their obligations, they're turned over to a federal entity, the Pension Benefit Guaranty Corp., which insures the pensions of 44 million Americans. The PBGC announced it had lost more than $4 billion dollars on investments in fiscal 2008 through September. In recent years, the corporation has owed more money than it has available. At the end of fiscal year 2007 it had $68 billion in assets but $83 billion in liabilities. To make up the difference, in February it moved away from its old system of keeping money in Treasury securities and other safe investments and toward buying more stocks, bonds from emerging nations, low-rated bonds, and real estate, and investing money with private equity firms.

Public pensions aren't doing much better. The nation's largest public pension, the California Public Employees' Retirement System, has lost $63 billion, or 25 percent of its assets, since the beginning of 2008. If it can't recover that money, it could mean higher taxes for Californians.

The loss of retirement savings is forcing many retirees to scale back. They include Dan and Marion Gerbase of Venice, Fla. He worked in the food industry for 50 years, and the couple built an investment portfolio that they believed would be sufficient to fund a comfortable retirement. They have no company pension or medical plan, and they rely on Social Security and their investments for income. In the past year their portfolio has plummeted by 29 percent and their condo's value has fallen 30 percent. They are in their mid-70s and have Medicare coverage but still pay $3,800 a year for a secondary hospital and medical plan, plus $600 a year for drugs.

To compensate, the Gerbases say, they've cut back on dining out and they buy cheaper groceries. Like 46 percent of those polled, they've canceled vacations, including postponing a cruise and calling off their annual trip to visit friends and family members.

Because so much of their wealth was tied up in stock investments, the Gerbases, like 78 percent of our poll respondents, want to see increased regulation of financial institutions. "We need to not only make sure that Wall Street doesn't invest in bad things but also that they don't walk off with big pay packages on their way out," Dan Gerbase says.