By the 1960s, retirees also benefitted from universal health insurance through Medicare and Medicaid, sharp increases in Social Security benefits and new protections enacted by the federal government for workers who received traditional pensions, which for decades were a standard employee benefit.
The changes rescued millions of retirees from poverty, while lifting millions of others to prosperous retirements symbolized by vacation cruises, recreational vehicles and second homes.
But now problems for future retirees seem to be closing in from all sides. Half of American workers have no retirement plans through their jobs, leaving people on their own to save for old age.
Meanwhile, four out of five private-sector workers with retirement plans at work have only 401(k)-type defined contribution accounts, rather than traditional pensions that pay retirees a fixed benefit for life. Numerous studies have found that workers with defined-contribution accounts often put aside too little money, make too many withdrawals or employ the wrong investment strategies to save enough for old age. Overall, people ages 55 to 64 have a median retirement account balance of $120,000, Boston College researchers have found, which is enough to fund an annuity paying about $575 a month, far short of what they will need.
Officials at money-management firms that handle 401(k)-type investments argue that the tools are in place for Americans to retire comfortably. The problem, they say, is that employers and workers are not using them correctly.
Robert L. Reynolds, president and chief executive of Putnam Investments, noted that 2006 changes in federal law gave employers the power to automatically enroll workers in retirement accounts. But too few choose to do that and even when they do, companies typically set aside only 3 percent of pay — far less than the estimated 10 percent that experts say workers need to set aside to fund a sound retirement.
“I would be adamant that there is nothing wrong with 401(k)s that can’t be fixed by taking better advantage of the current system,” Reynolds said.
Daniel J. Houston, president of retirement, insurance and financial services at the Principal Financial Group, contended that defined contribution accounts are better tailored than old-fashioned pensions to today’s highly mobile workforce. Workers can take them when they switch jobs. But that control also is a weakness, allowing Americans to tap them for non-retirement purposes.
The retirement savings shortfall is revealing an economic divide separating those who are well prepared for retirement from those who are not. Recent policy changes aimed at bolstering Americans’ retirement prospects have only contributed to the growing inequality.