American Retirement Accounts
American Retirement Accounts
In 1935, with the passage of the Social Security Act, our national leaders made a promise to all citizens: after a lifetime of hard work, no older American would suffer from poverty in their old age. The passage of this landmark legislation was the embodiment of a deeply shared value: a dignified, economically secure retirement. Seventy-five years later, however, our nation has greatly changed and our ability to uphold this value is severely threatened.
Social Security was never intended to be the sole source of income for retirees. Rather, it was supposed to be a supplement to other steady forms of retirement income, primarily employer-provided “traditional pensions,” as well as individual savings. Throughout the last few decades, however, traditional pensions have been largely replaced by employer-based retirement savings plans, shifting the risk of retirement onto workers, forcing them to gamble their retirement savings in the stock market or on even riskier investments. In addition, workers have been suffering from increasing economic insecurity, resulting in a decrease in personal savings. Even Social Security, the bedrock of retirement for most workers, is under political attack by those ideologically opposed to the system.
The erosion of retirement savings will take a toll: a recent report by McKinsey & Company asserts that, if current patterns continue, the average working American household is facing a 37 percent shortfall in the income they need in retirement. This shortfall is larger both for lower-income households and for younger workers.1 Forty-four percent of households have no retirement savings accounts at all.2 As a result, less than half of Americans are projected to have sufficient income to adequately maintain living standards in retirement, even when Social Security is accounted for.3 The economic crisis makes matters still worse: Americans are increasingly withdrawing money from their existing retirement accounts to meet immediate needs. Many older people are postponing retirement or trying to reenter the workforce at a time of high unemployment.4
401(k)-style plans are an inadequate solution to the nation’s mounting retirement crisis. First, they’re expensive. The exorbitant fees charged by firms that manage 401(k) accounts can cost workers a quarter or more of their retirement savings. Over a lifetime, these fees can add up to more than $155,000 in losses for the average household.5 Fees are levied on employers’ matching contributions as well. Another serious problem is the way that 401(k)s place the burden of investment risk exclusively on individual workers. After working throughout their lives, older Americans relying on individual retirement plans could lose their savings in a market crash, invest so conservatively that they ensure themselves weak returns, or outlive the funds they have been able to save. Pension-style plans, meanwhile, ensure security by spreading these risks among many plan participants over a long time horizon – no individual puts their entire retirement in danger.
- “Restoring Americans’ Retirement Security: A Shared Responsibility,” McKinsey and Company (2009). http://www.mckinsey.com/clientservice/Financial_Services/Knowledge_Highl...
- “Survey of Consumer Finances,” Board of Governors of the Federal Reserve System Webpage, March 1, 2012, Accessed online March 5, 2012. http://www.federalreserve.gov/econresdata/scf/scfindex.htm
- Munnell, Webb, and Golub-Soss, “National Retirement Risk Index,” October 2009. http://crr.bc.edu/briefs/the_national_retirement_risk_index_after_the_cr...
- Helman and Copeland, “2011 Retirement Confidence Survey,” March 2011. http://www.ebri.org/pdf/surveys/rcs/2011/EBRI_03-2011_No355_RCS-11.pdf
- “Robert Hiltonsmith, “$155,000 Swindle: The Hidden and Excessive Costs of 401(k)s,” Dēmos (April 2012).
- Brian Perlman, Kelly Kenneally, and Ilana Boivi, “Pensions and Retirement Security 2011: A Roadmap for Policy Makers,” National Institute on Retirement Security (March 2011). http://www.nirsonline.org/storage/nirs/documents/Public%20Opinion/final_...