The Retirement Conversation

Over the weekend Ezra Klein penned a nice column reminding us that the Social Security shortfall, state pension plan underfunding, and the declining value of 401k accounts are all related. The first two overlap on how demographics and the aging of the Baby Boomers will affect us all, while the latter two overlap on how the Great Recession left stock market investments decimated. Klein writes:

The failure [of the 401k], experts say, basically, is this: The typical worker approaching retirement needs about $250,000 in a 401(k). Most don’t come close. The average is closer to $98,000 – only a bit more than a third of the recommended amount.

That’s necessary context for considering the arguments over Social Security and state pensions. In both cases, most of the solutions don’t solve the problem so much as switch to a different one. The costs come off the government’s balance sheet but land on the backs of individual retirees. And it’s not clear how those retirees are supposed to pay for it.

As Andy Rotherham and I wrote in our report on teacher pensions:

The experience with 401k plans in the private sector is mixed. Some workers choose not to participate, and by doing so forgo free money if their employer is offering matching contributions. Individuals also tend to make poor choices with the money they do invest. They leave it in too-safe investments; they don’t adjust their investments for their age (younger workers can afford to take more risk, while workers nearing retirement should be more  conservative); or they park all their savings in company stock. When they change jobs, they cash out their savings rather than keeping it as money for  retirement. Most fundamentally, employees just don’t save enough. A 2007 GAO report found that, among workers aged 55-64 with a current or former DC plan, the median account balance was $50,000, a sum that would convert to an annual benefit beginning at age 65 of just $4,400.

In other words, the debate over government pension plans and Social Security must be kept in the broader context of retirement security for all. Private sector workers aren’t doing very well saving for retirement on their own, and at some point we’re going to have to figure out what that might mean for retirement benefits offered by government or private sector employers.