Blunting the Looming Retirement Crisis
While the attention of Connecticut's legislature has been occupied by the recent budget battles, an even larger crisis has been brewing: retirement security.
The ability of hardworking state residents to build sufficient retirement savings is in danger, and if nothing is done, the promise of a comfortable, secure retirement may disappear entirely.
We are seeing the results of a radical shift in employer-provided retirement benefits. In the past decade, the percentage of private-sector Connecticut workers whose employer offers a retirement plan has fallen from 68 percent in 2001 to 58 percent today, effectively shutting nearly 650,000 workers out of any workplace retirement plan to supplement Social Security.
And while the quantity of benefits was declining, the quality of those benefits was deteriorating as well.
Twenty years ago, most workplace retirement plans were defined benefit plans, which promised workers a fixed stream of income for their entire retirement and guaranteed a reasonable standard of living. Most retirement plans offered today, however, are defined contribution 401(k)-type plans, which place all of the risk on workers, who face the very real possibilities of losing their savings in a stock market plunge or of outliving their retirement savings.
Even worse, 401(k)s often have high (and often hidden) management, administration and trading fees that can eat into their returns, making saving for retirement even more difficult. Many studies have shown that the combined disadvantages of 401(k)s lead to many savers falling far short of the amount they need to maintain their standard of living in retirement.
If current trends continue, many of the workers who will begin retiring (or be forced to retire, as is the fate of many older workers) in about a decade will do so with far less in their 401(k)s than is needed to maintain their pre-retirement standards of living.
One largely unrecognized consequence of this is the impact that a large number of impoverished retirees will have on state budgets, Connecticut's included. Nationally, about half of workers ages 45-54 have no retirement savings whatsoever; many of them will have only Social Security to subsist on in retirement, leaving them at or below the poverty line. These seniors will then have to turn to Medicare for health insurance and social services to supplement their Social Security benefits, potentially placing an enormous strain on state finances.
This crisis can be averted, however, if state legislatures take prompt action to shore up the retirement security of their citizens. One idea that is particularly promising is that the state create individual retirement accounts that would be open to all citizens. Contributions to these accounts would be managed by state pension funds separately from public sector funds in a large investment pool, which would deliver higher returns and lower fees to savers. Participants would also have the option to annuitize their balances at retirement, providing them with a lifetime stream of income and removing the worry of outliving one's retirement savings that 401(k) participants face today.
This is not some pie-in-the-sky proposal. In fact, it's the basis for a bill just introduced by California state Sen. Kevin De Léon. Versions of this proposal are being considered by other states as well.
Connecticut could be the first state to confront this under-the-radar crisis by setting up a commission to study the retirement security of its citizens, and making recommendations for reform based on its findings.
The commission could examine the failures of our current system, look at other states and even other countries for best practices, examine the costs of inaction and make strong recommendations for reform.
Taking these tasks seriously could put Connecticut in position to play a leading role in reform, and guarantee income security for retirees in generations to come.