It's funny, but it's also true. In the post, A Small, Deluded Minority Still Believes in Successful Retirement, the popular blog Gawker satirized the fact that the overwhelming majority of Americans are all too aware of their insecure retirement prospects.Hamilton Nolan, editor at Gawker, picks up on the National Institute on Retirement Security (NIRS) poll, publicized by the Washington Post, that the vast majority of Americans are anxious about not having enough money to retire. According to Gawker, the 15 percent of Americans who are not worried about retirement should "wise up" because they are being "completely unrealistic" about their financial future. I am sympathetic to their antics, as I have continued to advocate that retirement insecurity is no laughing matter.
Fox Business weighs in on the retirement debate in 401(k): Pass or Fail? In the article, I discuss the effects of linking investing and retirement in 401(k) accounts, but reporter Kathryn Buschman Vasel states the problem succinctly, "many of us don’t have the skills and become too emotionally attached when investing."
In my research, we have found that retirees need to save nearly 20 times their yearly income to maintain his or her standard of living in retirement. For example, someone taking home $100,000 a year will need about $2 million (on top of Social Security). If they cannot save at this rate - or they don't fare well in the market - they will face downward mobility in their "golden years."
The history of 40l(k) plans helps to explain why they are inadequate. 401(k) plans were invented for a specific group - high-paid workers wanting to reduce their pre-tax salary. However, these accounts were then sold by consultants packaging the idea for a broad set of companies. 401(k) plans were never intended to become the main tool for retirement savings.
Two recent articles feature SCEPA research as they shed light on the unfortunate trend emerging for Americans who hope to retire: downward mobility.
On February 16, 2013, The Washington Post ran the story, Fiscal Troubles Ahead for Most Future Retirees. This is the first time that Americans are going to be relatively worse off than their parents or grandparents in old age. The article cites SCEPA's Retirement Income Security Project and its work documenting the failure of 401(k) accounts to adequately prepare Americans for retirement. It also makes note that a diversity of organizations found similar results in retirement trends, including the conservative Heritage Foundation and the Senate's Committee on Health, Education, Labor and Pensions.
On February 19, 2013, the LA Times ran, A Crucial Step Toward Retirement Security for the Working Class. Reporter Michael Hiltzik gives a succinct overview of California's new law to help low-wage workers save for retirement as well as the political challenges to enacting this common sense solution. The new plan is modeled after SCEPA's State Guaranteed Retirement proposal. Once implemented, California will expand access to retirement saving for more than six million people
In my capacity as the Director of The New School's Schwartz Center for Economic Policy Analysis (SCEPA), I have been working with a research team to document the need for reform measures to prevent a crisis of downward mobility in retirement resulting from inadequate savings, eroding pension institutions, and decreasing access to and participation in effective retirement savings vehicles at work.
As part of this project, we are investigating how the environment in the years before retirement affects people's health and wealth when they finally get to an age to retire - similar to the long-term benefits of prenatal nutrition for a newborn baby and beyond.
Our new research paper, "The Crisis of Jobs and Healthcare for Unemployed Americans Aged 55-64", documents older individuals' experiences of unemployment, intermittent health care coverage, and increasingly harsh work conditions. Using data from the U.S. Census Bureau's Survey of Income and Program Participation (SIPP), we investigate the impact of the Affordable Care Act (ACA) reform on this population and whether the unemployment faced by older Americans is cyclical or structural in nature.
Exploring solutions to this crisis, including job retraining programs and tax incentive plans, we find that workforce development and unemployment insurance policies must take into account the new reality that the unemployed are increasingly older, extremely low income, less likely to be able to retire on pensions, have little access to spousal income or health care and are often displaced from their career industries.
These results illustrate the increasing vulnerability of those approaching retirement age and suggest potentially dire results of raising the Social Security retirement age.
Blowing Smoke at the Retirement Crisis
This blog was written by Teresa Ghilarducci and Joelle Saad-Lessler and originally published by the Huffington Post on December 21, 2012.
The lobbying group for the mutual fund companies surprised Americans with a report that declares all is well with their retirement income security. The Investment Company Institute's (ICI) December report, "The Success of the U.S. Retirement System," asserts that the retirement system adequately prepares Americans for a comfortable retirement.
We know that private groups often bend the truth closer to their interests, and ICI is paid to make 401ks and IRAs look good. But the degree that ICI distorts the truth in this report defies convention and common sense.
So let's take a closer look at the assertions made in ICI's report and figure out how they tortured the data until it gave them the findings they wanted.
First, ICI goes so far as to claim that the switch from defined benefit (DB) type pension plans to defined contribution (DC) type plans leaves workers better prepared for retirement. However, workers are better off if their employer shoulders the risk and guarantees a pension for life in a DB plan, rather than putting their savings in a DC account that is subject to the gyrations of the market. They are also better off if their employer contributes towards their retirement, if they can pay lower fees, and if their money is professionally managed -- all of which are attributes of DB plans and absent in DC plans.
Second, they compare the poverty rate among older Americans in 2011 to what it was in 1966. Notice their choice of time period. Most of the improvements in poverty accrued from 1966 through the early 1980s, before defined contribution plans proliferated. In fact, if the economists at ICI really wanted to prove that defined contribution plans leave retirees better off than defined benefit plans, why not compare the poverty rates for those two types of retirees?
Third, they use survey data that finds that younger households save for priorities such as education and housing, and only start saving for retirement later in life. They claim this is adequate based on simulations where a married couple household earning $87,000 begins saving at age 37 using a 401k-type private account and makes "moderate" contributions. According to their simulations, this household can expect to replace 93 percent of its pre-retirement consumable income in retirement. However, they assume employees will contribute 6 percent of their income (which they sustain until age 65), with a 3 percent employer match rate. With a median employee contribution rate of 2-3 percent, these simulations are unrealistic. This is especially true considering that close to half the workforce does not have access to any type of retirement account at work, and for those that do, more and more of their employers are dropping their match.
Fourth, ICI reports that 81 percent of near-retiree households have pension savings. However, they fail to mention the puny amounts accumulated. According to their numbers, median retirement assets for households earning $30,000-$54,999 were only $4,300, while households earning $55,000-$79,999 had a meager $28,000. It is a heroic overstatement to consider these sums an indication of a success story.
We and other retirement economists have been doing our best to alert Americans to the inadequacies of the U.S. retirement system to avert a retirement crisis. We are trying to fix a broken system while ICI is busy blowing smoke to divert attention from the problem. No one gains from maintaining the current system, except the investment companies that make a profit on the high fees they charge unsuspecting workers trying to save enough to escape the clutches of poverty in retirement.
Shame on you, ICI.
My new study with SCEPA researchers Joelle Saad-Lessler and Eloy Fisher, "The Automatic Stabilizing Effects of Social Security and 401(k) Plans," documents how the economic recovery is impeded by market-based retirement plans, such as 401(k)s, and shows how government-supported accounts such as pensions and Social Security stabilize and support economic recovery.
This study makes it clear that the private sector's historic transition towards market-based retirement plans and away from traditional pensions has not only harmed investors who lost their savings in the Great Recession, but injured the overall economy. In fact, 401(k)s not only de-stabilize the economy, they significantly undermine the benefits of other stabilizing programs, including the federal income tax, unemployment insurance, and Medicare and disability insurance.
As the first-ever comparative study of how large pension institutions impact the long-term business cycle, the study compares the effects of Social Security against market-based retirement vehicles such as 401(k) plans. The size of both of these systems - 93% of American workers are covered by Social Security, and 63% possess 401(k)-type retirement plans - gives them a significant influence on the economy.
The study finds that market-based retirement accounts increase the volatility of the business cycle, contributing to an overheating of the economy during expansive periods and exacerbating economic contraction during recessionary spells. On the other hand, Social Security helps to reign in the economy during periods of expansion, and stimulating it during recessions - a function known as an automatic stabilizer. The study finds that for every $1 increase in real GDP, 401(k) plans reduce government programs' automatic stabilizing impact by 15%.
Our study provides hard proof that 401(k)s are a lose-lose for both individuals and the economy. They expose individuals' retirement savings to market risk and hurt the economy's overall ability to create jobs and spur consumption. Economists of all stripes understand the importance of automatic stabilizers to the economy. Now is the time for policy makers to follow by addressing the unintended consequences of incentivizing market-based retirement accounts at the expense of programs that are a win-win for everyone, including traditional pensions and Social Security.