Republican deficit hawks are recycling one of their old favorites: privatizing Social Security. While many veteran GOP pols are reluctant to tackle the popular entitlement, others believe that George W. Bush’s idea remains the best way to approach the issue.
They are wrong, and a Saturday Wall Street Journal story shows why. The WSJ interviewed couples who had responsibly put money in the stock market through their company 401(k)s. Many don’t have enough for a comfortable retirement, but those with defined pensions are better off.
(If you are a retiree living comfortably with the benefit of Social Security and a defined pension, please resist the impulse to comment smugly about how smart you were. You were lucky.)
From the WSJ:
The 401(k) generation is beginning to retire, and it isn’t a pretty sight.
The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings (emphasis added), most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.
This analysis uses estimates of 401(k) balances from the end of 2010 and of salaries from 2009. It assumes people need 85% of their working income after they retire in order to maintain their standard of living, a common yardstick. . .
The problems are widespread, especially among middle-income earners. About 60% of households nearing retirement age have 401(k)-type accounts, according to government data, and those represent the majority of most people’s savings. The situation is less dire for those in a higher income bracket, who tend to save more outside their 401(k) accounts and who have more margin for error if their retirement returns fall below the recommended 85% figure. . .
In general, people facing problems today got too little advice, or bad advice. They didn’t realize that a 6% annual contribution, with a 3% company match, might not be enough.
Some started saving too late or suspended contributions when they or their spouses lost jobs. Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their planned retirement dates.
In the stock-market collapses of 2000-2002 and 2007-2009, many people were over-invested in stocks. Some bailed out after the market collapse, suffering on the way down and then missing the rebound. . .
Consider households headed by people aged 60 to 62, nearing retirement, with a 401(k)-type account at their jobs.
Such households had a median income of $87,700 in 2009, according to data from the Center for Retirement Research at Boston College, which derived this and other numbers by updating Fed survey data, at The Journal’s request. The 85% needed for retirement would be $74,545 a year.
Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. (Emphasis added) That leaves $39,465 needed from other sources. Most 401(k) accounts don’t come close to making up that gap.
In the long run, workers will probably have to either work until they are 70, scale back their retirement dreams substantially or a combination of the two, as Megan McArdle, a center-right economics writer for The Atlantic Monthly, points out:
Whether Americans know it or not, they have spent decades basing their retirement plans on expectations of big capital gains in their houses and stock portfolios. But no system can completely protect us from the problem of lower asset returns. Schrager suggests that unless we suddenly become willing to save a huge chunk of our income every year, we may need to rethink our retirement plans. “I don’t know if it’s ever going to be realistic that everyone saves enough to spend the last third of their life on vacation,” she says.
That’s all right for economists and journalists, who can probably spend a good bit of their golden years at a desk, typing. But is that realistic, or appealing, for people with less cerebral jobs? Realistic or not, it may be the future for all of us.
Social Security must be preserved as a defined-benefit. Otherwise, the United States can look forward to returning to a time when many of the elderly lived in poverty. And, in the future, there will be far more of them than there were in the 1930s.