WaPo: Americans Can’t Handle Saving for Retirement

Regardless of your familiarity with the retirement savings system in the United States, I’m going to recommend you go read this Washington Post piece that first ran yesterday, “The 401(k): Americans ‘just not prepared’ to manage their own retirement funds.” It works as a primer, refresher, history lesson and thought provoker.

There’s also a powerful lesson about unintended consequences, captured nicely in the opening lines,

“When lawmakers added a subsection to the tax code called the 401(k) more than three decades ago, they could not have imagined that this string of three numbers and a letter would become a fixture in the financial lexicon.

Nor could they imagine the stress it would unleash.”

A couple of substantive points I’d add to the article, it should be clear from reading it that the 401(k) model isn’t working all that well for us nationally, tens of millions aren’t included in it, tens of millions that are included aren’t saving enough. If you want to dig into the numbers a little more deeply I’d recommend our paper from last November, “Facing Up to the Retirement Savings Deficit” in which Michael Calabrese makes a lot of the same points that he made when testifying before Congress two weeks ago, namely:

“Employer-sponsored plans cover fewer than half of all private sector workers, leaving a projected majority of baby boomers and Generation Xers even more dependent on Social Security than their parents’ generation is today. Coverage and participation rates are strikingly lower among workers who are low-income, young, work part-time, or work at small firms.”

So the system that many in Washington assume to be the default model for retirement doesn’t work at all for half of America and is less effective for higher percentages of vulnerable populations. On top of that, it’s basically a historical accident. Should we rethink this?

There are options out there that don’t involve scrapping the whole thing. The Auto-IRA proposal that’s currently supported by Sen. Jeff Bingaman and Rep. Richard Neal basically doubles down on the existing model and knocks down barriers to access for tens of millions of workers, especially those vulnerable populations Michael mentioned. That would mark a major improvement on the access side, but what about the lack of adequacy featured in the WaPo piece? Bill Gale from the Retirement Security gets at the answer (and is an actual expert in these things) in the piece when he points to recent changes that alter the structure of 401(k)-type plans to set appropriate defaults and help account holders make the tough decisions easier:

“‘It’s kind of like we ran all the way to the cliff to D.C. [defined contribution] and then looked over the cliff and decided to make them more like D.B. [defined benefits],” Gale said.”

That’s where our Universal 401(k) proposal would make a difference, by making access truly universal, explicitly matched to a robust, refundable retirement savings credit, and with a host of other improvements (including higher base contributions) we could transform the existing system into one that at least has a shot at working for more than just the lucky few.

One more related point, the 401(k) model depends on, among other things, a long time arc in order to give compound interest a chance to help workers out. In order to support that feature, how about opening accounts at birth and adding two decades to the calculation?

We can improve this system, and we can do it in a way that’s thoughtful and intentional. 35 years after we haphazardly created 401(k)s, maybe it’s time we did that?