More on Retirement (In)Security

January 15th, 2013 at 12:53 pm

Important piece by Mike Fletcher in this AMs WaPo that strongly amplifies points I stressed here the other day.

The Post reports that more workers, financially stressed by cash flows that fall short of their family budgets, are turning to early withdrawals from their 401(k)’s:

More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.

With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees.

OK, federal deficits are not “soaring”—they’re eminently manageable—and while it’s legitimate for the large social insurance to be in the mix in budget negotiations, the point I’ve been stressing and that this article underscores is that any version of entitlement “reform” must protect the economic security of vulnerable retirees.

What we see here is much the same thing we see in the figure below showing the rising share of working households unprepared for retirement defined by the Center for Retirement Research as having too little income in retirement to allow them to retain their pre-retirement living standards.   As they raid their retirement accounts—basically borrowing from the future to meet present needs (and doing so with a hefty tax penalty)—those bars will get higher over time.

The problem is that two of the three legs of the retirement security stool are wobbly.  Those legs are Social Security, pensions, and savings, and only the former is solid.  Any reform efforts should keep it that way.  In the meantime, if people could earn more, they could save more, so there’s a jobs and wage agenda here as well.

Source: Center for Retirement Research


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8 comments in reply to "More on Retirement (In)Security"

  1. Ed Walker says:

    Just exactly who are you planning on screwing in your austerity struggles? The few retirees who managed their lives well, who got lucky, and made it to retirement with enough to enjoy it and leave something to their children? Maybe you mean cutting Social Security and Medicare for the top 10%, and maybe a few more?

    Please share with us why that a) has any measure of fairness b) will produce any real savings.

  2. Joe says:

    What we see here is much the same thing we see in the figure below showing the rising share of working households unprepared for retirement defined by the Center for Retirement Research as having too little income in retirement to allow them to retain their pre-retirement living standards.

    Is that really the measuring stick we should be using? If while working I drive a BMW but post retirement, in order to save money I drive a Chevy does that put me in the unprepared category? Even going from new to used isn’t a horrific compromise of living standard. Same with luxury items from clothing to vacations. Is some degree of frugality in retirement a “risk”.

    I really think the notion that pre-retirement standard as the constant in retirement is way, way off base.

    • Fred Donaldson says:

      The problem is not going from a new BMW to a Chevy in retirement. The issue is $1,400 a month when you are too old to work doesn’t pay the bills, and half of Soc Sec recipients make less than that.

      All the financial whiz kids have the spiel that Soc Sec is some kind of welfare/insurance whiz bang thing, when in fact it was designed as a base for retirees to be paid out on the basis of contributions.

      Imagine the response if we asked all the hedge fund managers to reduce their retirement savings to say, $2,000 a month, and the rest of their income was to be used for “other purposes.” That’s what we propose with even more regressive benefits for Soc Sec in order to save taxes for the folks who live on capital gains, dividends and 15% taxes for hedgies.

      • Joe says:

        My point is, and I think you missed it, is that using pre-retirement standard of living as the basis for these charts is simply not valid. Very few people will be able to enjoy the SAME standard of living pre and post retirement. There has to be a better set of statistics that more accurately reflects problems with the retirement savings/income system in place.

        BTW – SS is a progressive program. While payments are capped in terms of % paid and amount of earned income taxed benefits are limited and capped. In fact lower income earners receive far more than they contribute while higher earners receive less in benefits.

  3. save_the_rustbelt says:

    The 401(k) system makes money for sales people, administrative companies and mutual fund companies, but the last ten years there have been few returns to the employees.

    Time to rethink this lemon.

  4. Bobby Goren says:

    Call it the great 401K scam. Everyone with a defined benefit plan knows that a tax advantaged savings plan is a great augment to a defined benefit plan – not a substitute. In the 1990s when the market hit the roof we were sold a 401K bill of goods so companies could offload their defined benefit plans. In the 200s we were sold on “the ownership society.”

    Worse, many companies and governments used high market returns to begin under funding their legacy plans. Now, with so many plans in crisis, companies and governments are crying about the unsustainability of their prior commitments.

    Actuarial science is not magic. It’s actually fairly easy to figure what to put away using reasonable assumptions on financial returns. Moreover, if there are a few years of great market returns they need to be banked for the bad years that inevitably come.

    It seems likely, though I can’t prove it, that companies and governments used outsized market returns to intentionally under fund plans to get what they couldn’t at the bargaining table when they agreed to pension benefits as part of a total compensation agreement.

    In a way it’s not that dissimilar to GOP tactics over the debt ceiling.

    Step 1: Approve spending in excess of revenue.
    Step 2: Refuse to raise revenues at all.
    Step 3: Scream bloody murder about a debt and deficit crisis.
    Step 4: Hold the Nation’s credit hostage to force the Executive to cut programs you couldn’t or wouldn’t.
    Step 5: Rinse & repeat.

  5. JemWallis says:

    ‘But where are the customer’s yachts?’