Commentary | Retirement

Why we need Retirement USA

The following remarks were delivered by EPI Vice-President Ross Eisenbrey the National Press Club Tuesday March 10, at an event marking the launch of Retirement USA, an initiative of EPI, the National Committee to Preserve Social Security and Medicare, the Pension Rights Center, and the Service Employees International Union (SEIU).

Why do we need the Retirement USA Initiative? Because the system we have now has failed most Americans.

The stark facts are these:

Only half of full-time workers have a retirement plan through their employer, and coverage is much lower for part-time workers. Participating in a plan doesn’t mean a worker is adequately preparing for retirement. The median 401(k) account balance was only $25,000 in 2006-$40,000 for workers approaching retirement age. In other words, half of those who had a 401(k) were nearing retirement with less than $40,000 in their account.

Even before the stock market slide, the average person with a 401(k) was on track to retire with only 20-40% of what they need to maintain their standard of living. Account balances have fallen by a third since late 2007, leaving many older workers unable to retire just as our economy is shedding millions of jobs.The failure is broad and deep. It’s not just a few people falling through the cracks: most of us are already in the ravine. In the private sector, only two in 10 of us have a secure pension. Three in 10 have only a 401(k) or similar savings plan-and the rest of us are totally out of luck.

Let’s be clear. A 401(k) is not the equivalent of an employer-provided pension. They were designed as supplemental savings plans-not as vehicles to provide meaningful retirement income. In the current downturn, just about everyone in 401(k) plans has lost substantial savings, but low- and middle-income workers who have to rely on 401(k) plans as their only supplement to Social Security have been hurt the most. And to make matters worse, employers can and do suspend their 401(k) match whenever they want (unless it’s part of a collective bargaining agreement, of course). Even before the recession hit, workers were shouldering two-thirds of 401(k) costs on average, and bearing all of the risks.

To borrow a phrase from Jared Bernstein, Vice President Biden’s chief economist, we have moved from a “we’re in this together” system to a “you’re on your own” system. Jared calls it “YOYO.” Traditional pensions, by pooling the retirement funds of workers who retire in bull markets and bear markets, insure workers against financial risk. Moreover, they provide workers and spouses with a retirement income for life, even those who live to 100. But fewer and fewer workers have these kinds of secure pensions, and 401(k)s are simply not up to the job. The YOYO system has winners. The shift from pensions to 401(k)s has been lucrative for financial firms.

High fees are one reason investment returns are roughly 1 percentage point lower for 401(k) participants than for pension funds, though no one knows the exact cost because these fees are not transparent. Over time, this can siphon off as much as 30% of 401(k) accumulations for long-term investors. 401(k)s also serve as tax shelters for the wealthy: a whopping 70% of tax breaks for 401(k)s go to the top 20% of households. Most of this money is wasted, because these households aren’t necessarily saving more, they’re just saving more in tax-favored accounts. The temptation is to blame the victims. “Why aren’t people saving more? Why do they make poor investment choices?” But 401(k)s were never designed to help the average worker save for retirement. The tax incentives for savings are completely upside down: they provide the most help to those who need it the least. And even Nobel laureates in economics admit that they don’t manage their 401(k)s wisely.

In any case, a study by the Congressional Research Service demonstrates that even 401(k) participants who do everything by the book-socking away 8% of their earnings into a conservative lifecycle fund over 30 years-are exposed to an enormous amount of risk. Based on historical measures of risk and returns, the luckiest 5% will end up with more than four times as much as the unluckiest 5%, who will see a drop in living standards at retirement despite years of diligent saving. It’s no wonder the average 401(k) participant has only 20-40% of what she needs to be on track to maintain her living standards in retirement.

This all comes at enormous cost. Taxpayer subsidies for retirement plans totaled $114 billion in 2007. If this were distributed directly to retirees, every American 65 and over would receive a check worth over $3,000 per year, or nearly a quarter of the average Social Security individual retirement benefit. And this understates the total long-term cost of tax breaks for contributions made to retirement plans in 2007, which is nearly double that amount.

If we’re going to make taxpayers subsidize the private retirement system, it should at least do a better job. We need a universal system, not one that leaves half of us behind. We need a secure system, not one that gambles with our retirement and allows us to outlive our savings. And we need an adequate system funded through steady contributions and managed efficiently, not one where the tap turns on and off and the bucket is leaky.

Traditional pensions work well for workers who have them. But not all employers are in a position to take on long-term pension obligations. Given that 401(k) plans have failed to provide most workers with adequate and secure retirement, we need a comprehensive solution: a retirement system for the 21st century that combines the best features of both traditional pensions and 401(k) plans in order to minimize-not simply shift-costs and risks. And this system will need to be the shared responsibility of employers, employees, and the government.

We need solutions that will meet these goals in the real world, not in an idealized one. Although the Retirement USA has not endorsed any particular proposal, I do want to mention that as part of EPI’s Agenda for Shared Prosperity, Professor Teresa Ghilarducci has developed a Guaranteed Retirement Account plan that conforms to the principles we are unveiling today. Thanks to the Rockefeller Foundation, we have been able to spread the word about our plan and engage others to consider it. But to achieve comprehensive reform, we will need more than one plan, and more than one group. This is why EPI is very pleased to be part of the Retirement USA initiative.

We look forward to working with our other partners and other organizations in pushing for a universal, secure, and adequate system that in conjunction with Social Security will ensure retirement sufficiency for America.

See related work on Retirement | Social Security

See more work by Ross Eisenbrey