We all know about the small business health care crisis. It's been front and center in the news media and on the agendas of most small business groups. But another silent crisis is looming.
It potentially affects far more small business owners and employees. But because its full impact is still years down the road, it has received far less publicity. Yet the small business retirement crisis is a ticking time bomb waiting to explode over the next two decades as baby boomers begin to retire in earnest.
Today, more than 60 percent of small business owners do not offer any retirement plan for their employees and 47 percent say they are unsure about how they plan to handle their own retirement, according to a survey by Harris Interactive for ShareBuilder, an online brokerage company.
Not surprisingly, sole proprietors were the least prepared; only 6 percent of those who work by themselves have a 401(k) plan. Meanwhile, more than half of all business owners polled (55 percent) said they never plan to retire, and a shocking number, 62 percent, have no exit plan at all.
Working until you drop may be one solution to the retirement crisis for business owners, but it's hardly realistic, and tens of thousands of employees don't even have that option. But the problem doesn't end there.
A new survey released this week found that only 18 percent of small business employees reported savings of $100,000 or more in all household retirement accounts compared with 29 percent of employees at large companies. In contrast, experts say the average household needs about $2 million in retirement savings to support a middle-class retirement, especially if boomers, as expected, live longer, healthier lives than preceding generations.
Even more distressing, about one quarter of all Americans have no retirement savings at all, according to the latest retirement confidence survey by the Employee Benefit Research Institute. The EBRI study found that a majority of workers it surveyed were unaware that their pensions were shrinking or that Social Security benefits were likely to decline in the face of rising age requirements to collect full benefits.
Today, retirees count on Social Security for about 40 percent of their retirement income. In the future, Social Security will provide only about 14 percent of retirement income. The rest will have to come from other sources.
But what will these sources be? The Commerce Department reported last week that the personal-savings rate was negative 1 percent for the first quarter this year, continuing a two-year trend. The last time the savings rate was this low for this long was during the Great Depression.
"This lack of planning for the future could have severe consequences for the average American's retirement security," says ShareBuilder Chairman and CEO Jeff Seely, whose company has conducted several surveys on the issue.
This grim situation is unlikely to change in the short term. Nearly three-quarters (73 percent) of small businesses that don't offer a retirement plan are unlikely to add one in the near future, according to a wide-ranging survey by Transamerica Center for Retirement Studies. Employers cited a variety of reasons; the top four were: their company is too small (43 percent), management or employees lack interest (41 percent and 34 percent, respectively), and costs are prohibitive (34 percent).
In Congress, Sen. Jeff Bingaman, D-N.M., is trying to remedy the problem by requiring small businesses to offer Individual Retirement Accounts (IRAs) to their employees. The measure would apply to companies that have been in business for at least two years and have at least 10 employees. Businesses would receive temporary tax credits to help offset startup costs.
Even if the idea flies, however, nothing guarantees that small business employees will take advantage of it. The Transamerica study found that they are less likely to participate in company programs compared with large company employees, and their company programs are typically less generous.
Catherine Collinson, a Transamerica retirement and market trends expert, says ample opportunities exist for employers and employees alike to improve their retirement preparedness. The federal government has also created a number of new incentives in the recently enacted Pension Protection Act to encourage employers to start retirement plans.
The sad fact is most small business owners are unaware of the programs or harbor misconceptions about how much they cost. Small business groups need to take the initiative to dispel those myths and encourage employers to start plans. They not only provide an important benefit that will help in hiring and retaining workers, but they will also safeguard their own retirement as well.
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