There are two schools of thought when it comes to how well Americans will fare in retirement. One says we are on the verge of a crisis, that the age of the 401(k) has left large numbers of us without sufficient money for our old age. A second group is more sanguine. They point out Americans spend less in retirement than when they worked, and claim the others are overreacting.
It’s increasingly looking like the chicken littles have it right. But all too many politicians and policy wonks remain in denial, offering “solutions” to the upcoming financial mess that don’t provide much help.
The latest warning comes in the form of a research brief for the Center for Retirement Research at Boston College by economists Gal Wettstein and Robert L. Siliciano, who studied not only how quickly retirees spent their accumulated savings but also whether they lived in households receiving pensions or not.
Spoiler: The people who continued to receive a monthly guaranteed income from their employer, rather than relying on whatever they had saved and invested during their working years, drew down their savings at a slower rate. By the age of 70, a retiree who exited the workforce with $200,000 had $28,000 more on hand if they received a pension than if they did not.
This does not bode well for the future. As the authors note, in the past retirees have drawn down their savings at a surprisingly low rate, but the research reflects a generation where pensions were far more common. “If you are in a world without a pension, you should be ideally drawing down money slower to avoid exhausting financial resources, which is all you have in this world without a pension. But that’s exactly the opposite of what we see,” Wettstein told me.
According to numbers that he and Siliciano crunched from the University of Michigan Health and Retirement Study, someone born in 1945 has a better than half chance of living in a household where at least one person receives a pension. The number drops to about 25 percent for someone born a mere eight years later. By 2020, according to the Bureau of Labor Statistics, only 1 in 7 private-sector workers worked at a firm with access to a defined benefit plan.
When the 401(k) debuted more than 40 years ago, it was meant as a supplement to pensions, not a replacement. But employers, under pressure from shareholders to cut costs, often jettisoned pensions entirely. They dumped responsibility for retirement planning on employees, without increasing wages to cover these new employee-borne costs. Without any extra income, and costs surging for everything — from housing to child care to education, our personal savings rate did not increase. Instead it fell from about 10 percent in the early 1980s to around 5 percent today.
Despite decades of cheerleading from the business press, in other words, most Americans are not putting enough of their own money away, and what they do save is often less than ideally invested. (Fidelity’s plans to offer 401(k) crypto investing options is just the latest potential boondoggle.) The system favors the wealthy, who can afford to stash enormous sums of money for decades in tax-advantaged accounts, over the cash-strapped middle-class. And then there are the one-third of private-sector workers who receive no workplace retirement savings options at all.
So what’s the most likely fix coming out of Washington? Double down.
The Secure Act 2.0 passed the House this year in a bipartisan vote, with barely a whisper of dissent. It increases the amount of money people over age 62 can set aside in tax-advantaged retirement accounts, and ups the age at which they need to begin taking mandatory distributions from 72 to 75 — two things that will generally benefit only the wealthiest seniors.
A provision to mandate auto-enrollment in plans is helpful — simply allowing companies to do so increased the number of people participating in workplace plans significantly — but that provision only applies to new plans, and is not in the Senate version of the bill. And no, it doesn’t actually require any company to offer retirement savings options or to match employee contributions.
It would be more helpful to buttress the Social Security Trust Fund and increase benefits, but there’s little action on that front. Sure, there are bills, including one sponsored by Rep. John B. Larson (D-Conn.) and another introduced by Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.). But neither bill has any Republican co-sponsors and no one is upbeat about their prospects.
Republicans, meanwhile, are pushing ideas that would make a bad situation worse. One would allow people — in practice, mainly women — to receive a Social Security stipend to cover family leave, at the cost of delaying when they could take money from the program in retirement. (Women, notably, are more dependent on the program to avoid poverty in old age.) Then there’s Florida Sen. Rick Scott’s demand that all government programs receive congressional renewal every five years — which would all but put a bull’s eye on Social Security.
Meanwhile, inflation is at a 40-year high, while the stock market — which holds so many of those 401(k) investments — is swooning. Seniors and those in late middle age are going to need more help than just another tax-advantaged investment option. Too bad Washington doesn’t appear capable of delivering it.