The Looming Retirement Crisis

Are mandated retirement accounts the answer?

June 6, 2011

Here’s a frightening stat: One in four workers over age 50 burned through all of their retirement savings during the Great Recession, according to AARP’s Public Policy Institute.

On top of that sad statistic is news from the Brookings Institute that almost one half of U.S. employees now work for businesses that provide no retirement plan at all. That’s around 78 million people who will have nothing other than Social Security and any other savings and assets they manage to accumulate to support them in their old age.

Considering the paltry state of household savings in the U.S., the retirement picture for most Americans is increasingly dim—and it’s showing up in the expectations of a once confident populace. Almost one half of Americans lack confidence that they’ll have enough money to live comfortably in retirement, AARP reports.

Social Security—the easiest of our entitlement programs to fix in terms of economic and financial pain—is a perennial political football in the toxic, partisan mood that blankets our policy debates today.

Mark Condon
This is the first in a series of book reviews by Mark Condon, CUNA's senior vice president, business and consumer publishing, and other credit union movement leaders. Check back soon for the next installment.

Most private-sector companies no longer provide workers with traditional, defined-benefit pension plans. Most of those plans have been replaced by 401k accounts, which were designed to supplement pensions, not replace them.

Employee contributions to 401K plans are far below what they need to be to secure a comfortable retirement, and 401K matches by employers are susceptible to the whims of those employers.

Then there are relatively generous public sector pensions that are threatened by the poor condition of state and municipal finances—and a growing belief that government employees should not have more generous retirement programs than private-sector employees.

And while generous on paper, many public-sector pensions are grossly underfunded. Throw in dwindling or stagnant home values, the rising costs of health care, and the high percentage of workers over 50 that are unemployed or under employed—one way or another the ability to save for retirement is buffeted by strong winds of adversity.

Working longer and at lower-paying jobs to supplement Social Security is a future many workers now face.

Next: Solutions require practical and political will

Solutions require practical and political will

One would think that a nation as powerful and as rich as the U.S. should be able to craft and implement public policy that enables its citizens to retire comfortably, or at least with enough security to keep the wolves and vultures away from home and hearth. The reality is that solutions are available if we find the political and practical will to have an honest discussion about what needs to be done.

There are multiple starting points for that discussion. One is Teresa Ghilarducci’s proposal for guaranteed retirement accounts that she promoted in her 2008 book, “When I’m Sixty Four: The Plot Against Pensions and the Plan to Save Them.”

Ghilarducci was an economics professor at Notre Dame for 25 years. She currently is the director of the Schwartz Center for Economic Policy Analysis at New York City’s New School for Social Research.

Her book investigates the effect of pension losses on older Americans, and proposes a mixed system that includes Social Security and a new type of personal retirement savings account known as a Guaranteed Retirement Account. If adopted, she believes her proposal could guarantee workers 70% of their pre-retirement income once they have worked for 40 years.

Ghilarducci’s plan is radical. She opposes proposals to increase the retirement age for Social Security. Just because life spans have increased, she states, does not mean people live healthier lives.

She also questions the availability of good-paying jobs for older Americans who will be forced to compete with younger workers, especially when businesses may not adapt to a new employment dynamic and continue to prefer younger workers.

Under Ghilarducci’s plan, workers would be required to save 5% of their salary up to the Social Security earnings cap in a guaranteed retirement account. The accumulations in these accounts would be available after age 65. The government would guarantee the rate of return, and a government agency—not a commercial money manager—would administer the accounts.

You can almost hear the gasps of Libertarians and the large segment of the populace that prefers to shrink, not expand, the government’s role.

For guaranteed retirement accounts to become a reality there are significant cultural and philosophical barriers to surmount, as well as the type of heated rhetoric that accompanied attempts at health-care reform and mandates to buy insurance.

Ghilarducci would also eliminate the tax subsidies for 401ks, replacing them with a $600 refundable tax credit for each worker. This would help offset the financial sacrifice borne by workers setting aside the mandated 5%.

Ghilarducci rightly points out that the 401k tax subsidy is costly and simply doesn’t provide enough of a nudge to work. If it did, 401k balances would likely be much higher.

She admits the 401k is likely now a sacred cow, and proposes that existing contributions and earnings remain untaxed. But she is correct when she points out that rules enabling 401k participants to borrow funds, or collect them in a lump sum when leaving an employer, undermine their use as a retirement vehicle.

Next: Automatic IRAs

Automatic IRAs: An alternative?

President Barack Obama has proposed making retirement savings universal through an individual retirement account (IRA) that is funded by automatic direct deposits from paychecks. The concept is the brainchild of the Heritage Foundation and the Brookings Institute, and has been endorsed by publications as diverse as The New York Times and the National Review.

When I'm 64

The automatic IRA as initially proposed would be available to employees whose employers don’t offer 401k plans. It’s not viewed as a replacement for the 401k, but it would work as simply as direct deposit currently works to funnel savings into financial institution accounts as directed by employees.

But a key difference would be the ability of the employer to select a single provider of IRA services rather than allow employees to direct their funds to a provider of their choice.

Employees would not be forced to participate, but would have to formally opt out. Unlike the mandatory guaranteed retirement accounts Ghilarducci proposes, the automatic IRA is more of a “nudge” to direct employees to save more for retirement.

“Libertarian paternalism” is the seemingly contradictory term used by some behavioral economists to describe this approach. Yet given the deep divisions over health-care reform, our federal debt, and the need to reform entitlement programs, The Retirement Security Project, a nonpartisan project supported by The Brookings Institute, the Pew Charitable Trusts, and Georgetown University’s Public Policy Institute, is an excellent resource for information on the retirement crisis. It has a lengthy white paper devoted to automatic IRAs.

Ghilarducci’s proposal for guaranteed retirement accounts may never come to fruition, but “When I’m Sixty-Four” is as good and accessible as any book that clearly outlines the crisis facing Americans in retirement.

While mandated savings may be a tough sell, the simple fact is Americans may need more of a paternalistic approach than a libertarian approach. The latter may have a strong political or philosophical appeal, but given the pathetic state of 401ks as a strong retirement vehicle, the former may be far more practical.

MARK CONDON is CUNA’s senior vice president, business and consumer publishing. Contact him at 608-231-4078.