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Are we facing a retirement crisis?

An increasing number of people are approaching retirement with very little saved. Is it time to rethink the 401k?

By Karen Datko Aug 8, 2012 6:26PM

Image: Broken egg (© Tetra Images/Corbis/Corbis)Economics professor Teresa Ghilarducci, a vocal critic of 401k's, is back in the spotlight, this time with an opinion piece in The New York Times called "Our ridiculous approach to retirement."  


Ghilarducci, also interviewed on NPR's "Here & Now," warns of a pending retirement crisis, with plenty of seniors living in or near poverty. And she's not alone.


Here's basically what Ghilarducci says:

  • You'll need 20 times your annual income in retirement savings to maintain your current lifestyle. Ten times will work if your home is paid off and you have no debt.
  • Many Americans won't come close. "Almost half of middle-class workers, 49%, will be poor or near poor in retirement, living on a food budget of about $5 a day," she writes in the Times.
  • But don't be too hard on yourself. Blame, rather, the system of 401k's and IRAs that puts the burden on individuals, instead of professionally managed pension plans. Asking people to voluntarily save for their entire working lives and invest that money wisely is "like asking the family pet to dance on two legs," she writes.

What's wrong with 401k's? Your company's offerings may not be the best investments, and they often come with high fees that stunt your accumulation of wealth. Contributions are voluntary, and you can borrow from those funds or cash them out early. (Post continues below video.)

Plus, you're required to know the unknowable -- for instance, how long you'll live and how much you'll need to spend on health care in your golden years. And, not least, you're dependent on your investments performing well. 


That's hasn't worked out recently. "With little or no return for more than a decade -- and just as baby boomers begin to retire -- the savings crisis has pushed us to new levels of despair," Dan Kadlec wrote in Time earlier this year.

It seems that 401k's and the like work well for the affluent -- Ghilarducci says 80% of the tax breaks for contributions to these types of plans goes to the top 20% -- but what about everyone else? Only 16% of workers 55 and older said they were very confident they'd have enough money to live comfortably in retirement, according to the Employee Benefit Research Institute's new Retirement Confidence Survey (.pdf file).


What does Ghilarducci, the author of "When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them," propose instead? Here's part of her explanation from a column on Bloomberg Businessweek:

So let's scale back the tax breaks. Instead, we can use the money to help everyone sock away 5% of their pay in safe retirement accounts that would serve as a universal supplement to Social Security. People could keep their employer plan if it met more stringent standards such as a contribution rate of at least 5%, a ban on early withdrawals, and conversion into an annuity at retirement. Anyone without an employer plan would automatically be enrolled in a Guaranteed Retirement Account to which employees and employers would each contribute 2.5%. The government would then provide everyone a modest tax credit to offset the employee contributions. The return would be guaranteed by the government at about 3% above the rate of inflation -- or close to the real growth rate in gross domestic product.

The investments would be professionally managed, with lower fees and better results common to pension plans, she says.


U.S. Sen. Tom Harkin, D-Iowa, has proposed a similar plan, described in this post.


Other retirement experts say 401k's are not the best way to save for old age. Wrote Alicia Munnell, the director of the Center for Retirement Research at Boston College, in SmartMoney:

The time may have come to consider returning 401k plans to their original position as a supplement on top of Social Security and employer-sponsored pensions. Given the demise of traditional employer pensions, such a rearrangement would require a new tier of retirement accounts.

Ted Benna, regarded as the father of the 401k, says they've gotten far too complicated. Also from SmartMoney:

"We need a legislative mandate that when you change jobs, the money needs to be retained in a retirement account -- there cannot be an option of 'here's a check, you decide,'" Benna says. He also advocates mandating all employees be auto-enrolled in the plans, and that their contributions be automatically increased one percentage point per year to a maximum of 10% to 15%.

Is the outlook really that dire for boomers, many of whom, unlike their parents, will face retirement without a traditional pension? Says the EBRI survey:

Most workers have little put away in savings and investments, although older workers are more likely than their younger counterparts to report higher amounts of assets. However, nearly a third of older workers reported savings and investments of less than $10,000.

A new study by the National Institute on Retirement Security says only 43% of people over 60  received pension income in 2010, down from 52% in 1998. In the private sector, only 15% received a pension in 2010, according to Reuters.

The Reuters report added:

How important are defined benefit pensions in keeping seniors out of poverty? The study -- which is based on U.S. Census Bureau data -- found poverty rates were nine times greater in 2010 in households without defined benefit pension income. Pensions resulted in 4.7 million fewer poor or "near poor" families and 1.2 million fewer families on various forms of public assistance.

I've often wondered: What did we gain when retirement transitioned from a work-based pension to a system of voluntary savings funded mostly by the employee? It seems that employers and professional money managers got the better end of this deal, not us.


How's your retirement plan? Are you worried or confident that you'll have enough money when you're old? 


More from MSN Money:

Aug 9, 2012 10:05AM

At what point did people in our country become so stupid they have to constantly rely on government to take care of them?


Sorry to be abrupt but the truth needs to be told. The article acts as if Social Security is a rock solid program by the government. The current debt by the USA is $16 TRILLION and climbing. This does not include unfunded debt liabilities in Social Security & Medicaid of another $50 TRILLION+.


To suggest government could insure a defined pension plan and guarantee higher returns, when the current retirement supplement SS is collapsing is either insanity or outright stupidity. 


I don't disagree with the premise suggested about defined pension plans, but who would administer? Greedy Corporations who don't fund the pensions correctly? Greedy Unions who raid the pensions to keep elected officials in their pockets? Greedy Government leaders funneling monies & projects to those who help them keep power of what once was an elected position? Let's not forget the armies of lawyers who would insure all new laws and regulations are followed. After paying those legal fees, there might be enough left over to cover a new tax increase on your pension. 


Both parties are to blame, and worse yet, the American people are to blame for believing the Government should take care of them. 


Put a pension/retirement plan together at the local level, maybe county level. Those who work and contribute would receive a supplemental pension. Those who don't contribute would receive nothing. Hold monthly meetings where the citizens can review and discuss the plan. An equal number of elected board members of each city would also regularly review and audit the plan to insure it is being administered correctly. 


It's time we stop whining, get off our behinds and do for ourselves. A government can't help you if you are not willing to help yourself. God Bless and Help us. 





Aug 8, 2012 8:57PM
The professor is exactly right!

I have a defined pension and without it I would never have been able to retire.  I find it hard to believe that people really thought 401Ks would be better.  

In my 20's and 30's retirement was the last reason to save money, and I didn't know much about investing anyway.  I wasn't alone and I don't think people have changed much.  Priorities change with age and I can't imagine a 20 something being serious about saving for retirement, let alone managing their own portfolio, when one look at the staggering amount required is so discouraging.

Aug 12, 2012 12:38PM
Most people are not taught anymore to save for the future. Saving for retirement is a lifelong project. If you plan for it, it will happen. Folks have fallen in to the consumerism mind set. Everyone seems to want to have everything now. No one seems to want to save for it. You will not do well going into retirement with debt. House and all. But, sadly, the people that "get it" are like the choir being preached to. The ones that do not want to get it, never will. They will only want someone else to pay their way. Most people do not want to be responsible for themselves.
Aug 11, 2012 9:10PM
When did the person looking back from the mirror become dependent on others to take care of them?  SS had contributed to the dumbing down of America.  People don't bother to learn how to save, invest and build residual income.  Corporations and governments have no business in the retirement or medical fields.  Young people should know from the time they can converse that they and no one else is responsible for their health and welfare.
Aug 11, 2012 2:08PM
I advise any young people to save 15% of their clear income - learn to live beneath it - OR get a job with a good pension.  There are still a lot of private firms with good ones: oil companies, Otis Elevator, etc.

I left the chemical industry at a time when "green" wasn't a major thought (I could taste the chemicals I'd been using in research when I went for a run on Saturdays) and went into teaching chemistry and physics.  Industrial bench chemists had one of the shortest avg. lifespans of all careers.  I took a pay cut but got an excellent pension, even though I didn't work the 30 years to get the full benefit.

As Buy Low commented, when you're young and no one's taught you about the importance of retirement, you don't think about it.  It NEVER occurred to me when I switched jobs that the teacher's pension -with health insurance- was going to be such a major plus.  I just thought I was trading higher income for better health.  I'm comfortably retired now due to mostly to sheer luck, though I did put a decent nest egg away, beginning in my 40's.  There's not a day that goes by that I don't pat myself on the back for switching careers.

SO...if you've got young people in your family blowing their money, find a way to get them to be more responsible to their futures.

Aug 15, 2012 4:15PM

401K, 403B, and IRA withdrawals for retirement should be treated as Capital Gains. Billionaires get this tax treatment! Why not us middle class retirees?

Aug 9, 2012 7:20AM
It was the unions that brought us defined pension plans, for most companies in the US. There might be a very few exceptions, for the few companies, that are non union, that want to retain there best workers. There has been a campaign for several years, by corporations and a certain political party against unions. The anti union propaganda, that has been spread, has been succesful. My guess is fifty percent of Americans are anti union. The unions in this country, have been dwindling in membership and overall size. With the demise of unions, so goes the demise, of defined pension plans.
Aug 10, 2012 12:07AM

I'm glad I've dismissed the thought of ever permanently retiring from my mind.

From what I can see, it is being set up so that all of us from Gen X forward will be unable to count on living wages, any company provided benefits whatsoever, and, even retirement.

I see the way my elders and peers have allowed their health to be controlled by their employers, and, all I see are a bunch of fat people who don't care about their own health.

The government is supposed to be Of the People, By the People, For the People. Right now, it is not, because, once again, my elders and peers are unable to get up enough grit to take care of themselves let alone their progeny.

Way to go USA. Self Culling. Rome Part II falling, falling, and, the average citizen cannot be bothered....

Aug 11, 2012 1:48PM
"What's wrong with 401k's? Your company's offerings may not be the best investments, and they often come with high fees that stunt your accumulation of wealth."  The fees are so high that a just society would imprison half of Congress for allowing them.

People are being conned into thinking businesses can't afford defined benefit pensions. Yet a study shows, per dollar of retirement pay, "Pensions Can Provide Retirement Income at Half the Cost of Individual Accounts (401k, 403b, etc.)".
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