We have written a lot here at Demos about how the 401(k) system as been a total flop, leaving millions of Americans without enough money to retire. Holders of 401(k)s have gotten hit from nearly every direction: hurt by stock market meltdowns, ripped off by high administrative fees, and hurt by financial needs that lead them to withdraw money from their accounts.
Also, some 40 percent of workers don't even have acccess to a 401(k) at all.
So just how big is the shortfall facing America's future retirees? A big and scary number being offered up by the Retirement Research Center is $6.6 trilion. This figure, according to Retirement USA:
represents our current retirement income deficit – that is, the gap between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living. . . .
The deficit figure covers households in their peak earning and saving years—those in the 32-64 age range—excluding younger workers who are just beginning to save for retirement as well as most retirees. It takes into account all major sources of retirement income and assets: Social Security, traditional pension plans, 401(k)-style plans, and other forms of saving, and housing.
The measure assumes people will continue to work, save, and accumulate additional pension and Social Security benefits until they retire at age 65, later than most people currently retire. It also assumes that retirees will spend down all their wealth in retirement, including home equity. The deficit is thus in many respects a conservative number.
So we are talking a big shortfall here. Really big.
A variety of policies can help close this gap. One important step would be to junk the 401(k) -- which is subsidized by a generous federal tax break -- and move toward a system of Guaranteed Retirement Accounts, where all workers would have individual retirement accounts to supplement Social Security but which would be pooled together and professionally managed. A major flaw of the 401(k) system is that it is inherently inefficient, based as it is on individually managed accounts with financial firms acting as middlemen for every 401(k) holder. The GRA would rectify that problem and dam the river of fees that now flow into Wall Street's pockets, leaving America's retirees much better off.
Another solution to the retirement income deficit could be to increase the generousity of Social Security payments. This flies in the face of most deficit cutting plans, which hinge on reducing such benefits, but it's hard to look at the scant wealth of future retirees without seeing how we can avoid increasing Social Security.
Better financial regulation can also help. If the stock market is more stable, without so much speculation and recurrent crashes, retirees will have more money down the line.
As well, reducing income inequality is part of the solution. If tax policy, labor regulation, and other measures could shift wealth down the income ladder, and away from the top 1 percent, the mass of Americans could build bigger nest eggs for their golden years.
In the end, though, even partly closing that $6.6 trillon gap is going to require Americans to change their lifestlyes. People need to consume less and save more. We need to live in smaller homes, drive smaller cars, and buy less stuff we don't need. Public policy can promote this behavior through a progressive consumption tax and energy taxes (which make bigger cars and houses less desirable). Reduced consumption would have the added benefit of lowering the nation's carbon output.
Of course, though, it's hard to talk about scaling back personal consumption when nearly every political leader in America wants to see more consumer spending to spur growth. And, once the recovery is stronger, the focus will be on sustaining such spending.
So there lies a fundamental dilemma: Our prosperity has come to hinge on high levels of personal consumption, but our retirement security requires consuming less now and saving more for later.