Lost in the hysteria over several fiscal commissions' proposals to cut Social Security is the issue of how these cuts will affect Americans' overall retirement prospects.
President Franklin D. Roosevelt realized that Social Security was intended to give only “some measure” of retirement security. We’ve always been expected to supplement it by saving privately — either through employers or on our own. Especially now, Social Security cuts would just deepen the holes in an inadequate private retirement system.
Why inadequate? To start, few workers have access to any sort of workplace retirement plan — either a traditional pension or a 401(k)-type plan. In fact, more than half of U.S. workers have never been covered by such plans, which means roughly half the nation’s workers have a more difficult time saving — since they don’t get the pretax payroll deductions or employer contributions that often come with 401(k)’s.
For those with access to retirement benefits at work, 401(k)’s have superseded traditional pensions in the past 15 years as the most common plan offered by employers. Today, you’re more than twice as likely to be offered a 401(k) as a traditional pension, primarily because 401(k)’s are cheaper for employers, on average — more than $700 cheaper per employee. The popularity of 401(k)’s is precisely why the private retirement system is failing even those “fortunate” enough to have a retirement plan.
These plans were never meant to be the primary option for private retirement benefits. When Congress created them in 1978, 401(k)’s were intended to be — at most — a supplement to traditional pensions and Social Security. However, since 401(k)-type plans have become the primary way employers provide retirement benefits, the plans, by all measures, have not performed well.
Even before the stock market plunge in 2008 wiped out as much as 30 percent of all retirement savings, data from the Federal Reserve showed most workers had not saved nearly enough for retirement. Only a quarter of all working adults approaching retirement age (55-64) had saved more than $98,000 as of 2005 — as the stock market was approaching its last peak. Even that $98,000 is less than half what AARP recommends that individuals with moderate income need to have saved by retirement.
Overall, the aggregate national gap between what Americans should have saved and what they have saved for retirement is enormous. The Center for Retirement Research at Boston College, a nonpartisan research consortium, in a study conducted for Retirement USA, tried to quantify that gap. It came up with a staggering figure: $6.6 trillion. That’s more than 15 times the average yearly savings of the entire country.
Clearly, Americans have a hard time saving. Explanations abound, from falling wages and increasing debt to lack of individual responsibility. But no matter which you subscribe to, according to a recent report published by Demos, the deck is stacked against even those who do try to save.
Between opaque and expensive fees taken out of retirement account balances and volatile stock market returns, it’s no wonder people have difficulty saving enough for retirement. Few retirement plan participants — less than half the working population to begin with — are aware of how much fees can cost in their 401(k)-type plans. Over a lifetime, according to the report, fees can consume more than 20 percent of your potential balance at retirement.
In other words, if you retired with $400,000 in retirement savings accounts, there are cases in which you could have paid more than $100,000 in fees.
So what are these fees for? Anything from (usually) flat fees charged for plan administration and record keeping to investment management fees, levied as a percentage of your account balance. These expenses can add up to a tidy sum for mutual funds and other parts of the financial industry — by one estimate, profits top $85 billion.
In comparison, the average pension fund charges half as much to generate comparable returns. Put another way, 401(k)’s charge fees that can be 15 times as much as the Social Security Administration would spend to manage nearly the same assets.
This drain on our retirement savings should not continue. Between high fees and unpredictable returns, 401(k)-type plans are not suitable as the primary way for workers to ensure themselves a secure retirement.
Various reform plans have now been proposed by both business groups and economists. The strongest, guaranteed retirement accounts and the ERISA (Employee Retirement Income Security Act) Industry Committee’s guaranteed benefit plans, combine the best features of 401(k)’s — portability and individual ownership of savings — and traditional pensions: investment security and lifetime payments, to form the basis of a more stable and secure private retirement system.
If we want to avoid a reversal of the gains we’ve made in old-age security, we need to address the entire U.S. retirement system, not simply seek, as do the various fiscal commissions, to undermine its most stable pillar.