$6.6 Trillion Retirement Saving Shortfall Shows Failure of 401(k)’s
Last week the Washington Post ran a story on the weaknesses of 401(k) retirement accounts, focusing on the the fact that 1/4 of Americans with 401(k)’s have used them to meet current income needs. Among people in their forties, the share rises to 1/3, an astounding figure considering how close this group is to retirement. In the wake of the Great Recession and continuing job market problems, it is perhaps not surprising that 28% of 401(k) account holders presently have loans against their accounts.
As the Post delicately puts it,
Many employers have embraced 401(k) and other defined-contribution accounts as a way of helping workers save for retirement while relieving themselves of the financial risks that come with managing a traditional pension plan. In theory, 401(k) accounts are better suited to an economy in which workers are changing jobs more frequently than ever because the accounts can be rolled over from previous employers.
A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby “cut(ting) overall employee compensation,” and that 401(k) plans don’t take into account the stagnation of real wages, points well made by commenter “Sean2020.”
Moreover, as I reported before, 49% of private sector worker have neither a 401(k) or a defined benefit pension plan. Thus, they have no supplement to their eventual Social Security benefits unless they are able to save outside of a 401(k).
And they aren’t saving. At least, they’re aren’t saving nearly enough to maintain their standard of living after retirement. As a report from the Senate’s Health, Education, Labor, and Pension (HELP) committee states, there is a $6.6 trillion gap (methodology here) between what people need to maintain their current standard of living and what they’ve actually saved for retirement. This is equal to the combined assets of defined benefit pensions and 401(k) type plans, more than total state/local/federal government retirement plans, and more than twice as much as the Social Security Trust Fund. There’s a reason I’ve been using the word “crisis”!
Social Security Trust Fund $2.7 trillion (12/31/2012)
Defined benefit pensions $2.3 trillion (9/30/2012)
Defined contribution 401(k) $4.3 trillion (9/30/2012)
State/local gov’t employee $3.1 trillion (9/30/2012)
Federal employee retirement $1.5 trillion (9/30/2012)
IRA’s $4.9 trillion (6/30/2011)
Sources: Social Security Administration; Federal Reserve, tables L-116, L-117, and L-118 (financial assets only), for DB, DC, and government employee programs; Investment Company Institute for IRAs
This gigantic hole shows that the current model, based on 401(k)’s rather than true pensions, is not working. In a future post I will discuss ways to fix the crisis.
Cross-posted from Middle Class Political Economist.
it’s probably worse than you think.
my friend who was fired at the age of 63, after more than forty years with the company “because he wasn’t meeting his work plan”
got a pension too small to feed him.
and it will not be adjusted for inflation.
Social Security will keep him alive until the inflation bite gets too big.
That’s why it’s so important to cut Social Security so we don’t have these people getting more than they deserve.
a defined benefit is indeed risky for companies who may fall on hard times.
which is why Social Security is necessary.
if anything, we should raise the SS tax and raise the benefit so that it would be enough for a slightly more than decent retirement.
but of course people wouldn’t go for that. it’s a “tax” you see. even if they get the money back with interest when they need it most.
“more than twice as much as the Social Security Trust Fund”
This is a less than useless comparison. SS does not work the same way as a 401k.
” SS does not work the same way as a 401k.”
Nor is it suppose to!
exactly. that’s the whole point of SS. it works when all else fails. as it usually does.
usually = more that half the time
I hope my point was clear.
Listing the TF $2.7T with the 401k $4.3T makes is seem like you can compare them, which is misleading at best.
your point was clear to me. but i think it is unlikely most people would understand it.
even Angry Bear readers don’t get the point that the Trust Fund is NOT… nothing like… the money you have in your retirement fund.
just to help out any who care: the trust fund is mostly extra money paid by the boomers to make up the difference between normal pay as you go and the extra costs that would come because the boomer generation is larger than the one before it or the one after it.
the trust fund was always supposed to run out when the boomers were mostly gone from the scene, if not before.
even if the trust fund disappeared today it would make no real difference to SS. a need to raise the payroll tax about one percent a few years earlier than otherwise.. and that would be no injustice to those paying the higher tax as they will collect higher benefits because they are going to live longer at the higher standard of living they themselves will help to create for the future.
i mentioned my friend above, because even when you look at the bad economy and the bad stock market and the inability people have to really save money via 401-k’s
you haven’t reckoned with the fact that the corps are going to cheat you in other ways… like forcing you to retire early because it saves them money, and to hell with what it does to you.
and watch out for those pensions with no inflation adjustment. at a minimum, in ten years you will be trying to live on half as much as you thought you had.
my dear friends, the money masters are out to squeeze you dry and pick your bones… it’s just the way they are.
@coberly, younger boomers and Gen-X’ers are going to be in for a very rough ride. Sorry to hear your friend got screwed so badly.
We talk about the shortfall in savings now — was anyone talking about the overproductivity of the young and vigorous boomers back when they were all working and buying and raising kids and investing? The reason that big business and finance were able to shake down the boomers over the past 30 years is because they had been so productive in the decades leading up to 1980. You can’t get honey out of an empty hive. Whose fault is it that the hives are empty now?
The savings were there, but they’ve been eroded as investments, pensions, and housing values were targeted like stored honey. Large predators got a lot of it, but swarms of smaller thieves got their share too. And a lot of promises in the form of pensions were simply blown off, long after workers had delivered the labour for which those promises were partial payment — a retroactive pay cut.
So then, the Grey Tsunami looks likely to actually be an Elderly Indigent Tsunami as several million more seniors, till now just hanging on by dint of selling their homes and living on the principal, plus hanging onto part time jobs at Walmart, hit about 70 and run out of cash and the level of health needed to hold a job.
What does this look like? Their kids can’t support them, being few in number and with their own resources also depressed by the same strategies that pinched their parents. No, it looks like the government is going to have to step in. That is another instance of corporate welfare, with the taxpayer covering the cost of that theft and those retroactive pay cuts, while the corporations shapeshift their way out of decades-long obligations.
Ken is not discussing how SS and/or the TF works. He is discussing the problem of a shortfall in retirement funds. There is a gap of $6.6 trillion in the funds needed to retire on and maintain a standard of living compared to what is need today. the$6.6 trillion is > than twice the SS TF or the defined benefitpensions plus defined 401K contribution over a time period.
Add together the IRA and 401k numbers and there is a fund of $9.2 trillion. What is not clear is how much was put into those funds via employee paycheck deductions. After market gyrations of 1999-2000 and 2007-? are those funds losing ground? i’d be less concerned about the employee accessing their own funds. Though that does not bode well for their retirements, at least they spent the money. What is worse is the extent of market losses and the fact that those funds are the basis for fund management income. How much income do those funds generate for their managers each year regardless of performance? How much is .5%-1.5% of $9.2T? Given the relatively small number of people who make up that management group I’d say that that group is riding a high tide of income. Enough so that they won’t suffer in their retirements. In fact, why retire at all when you can earn a fortune just watching a computer screen and billing the fund each year for lack luster performance?
And for those who doubt the accuracy of my statement regarding fees:http://www.nytimes.com/2012/10/07/business/mutfund/mutual-fund-fees-are-declining-but-still-vary-widely.html?partner=rss&emc=rss
And note that the current fee ranges noted are following a period of declination of such fees because of their impact on 401k funds. Large cap average of 1.22% ain’t hay when applied to $9.2T. That comes to an annual take for large cap operators of about $112.24 Billion. That’s the minimum for watching over other people’s nest eggs. Too bad they don’t seem to do any better than market averages and often worse. Nice work if one can get it.
A few things not mentioned above, that I’d like to comment on. It’s impossible to save money when you’re making little more than minimum wage, or even $25,$30k.
Also, a report on Marketplace Money this a.m. was on people continuing to work into their 70s and beyond. Surprise,surprise, of the ones who were doing it out of choice, most were owners of businesses or in the professions – doctors, lawyers, etc. The ones doing it out of necessity can’t, I believe, be put in the same category as those who chose for personal reasons to stay in the workforce.
Coberly’s friend is not, unfortunately, a rarity. And when those 45+ try to get new jobs, they find the job descriptions are written so narrowly as to allow employers to eliminate older workers without being threatened with age discrimination suits.
yes, the hired experts like to blather about how folks can get higher returns from safe investments than from Social Security. They are lying.
But the also ignore the point that poor folks cannot afford the risks of the market… not even “safe” investments. And never, will never, save/invest enough to pay for any kind of retirement at all without Social Security, which at least protects their savings from inflation as well as market risks.
The moral here which seemingly escapes most of America is ….. SAVE YOUR OWN MONEY FOR YOUR OWN RETIREMENT.
Do not trust your employer to do it for you as you cannot trust your employer. Likewise do not trust the government to do it for you as you for damn sure can’t trust the government.
Social Security is a ripoff and if you thought that you would be retiring comfortably on your Social Security pension, you are a fool and are deserving of the ass kicking heading in your direction. You’ve been taken to the cleaners despite having been warned for every bit of a generation. Your Social security benefits have been relentlessly adjusted down via manipulation of the rate of inflation since the Reagan administration. If your inclination is to hate Republicans for screwing you, get over it as the Clinton administration further cooked the books in order to short your payout as or more profoundly than did Reagan. The inflation that will now starve you is courtesy of the financial management of both Bush and Obama equally …. for the time being. Four years from now Obama will have blown Bush’s doors off in terms of devaluing your savings, pension benefits and currency.
Americans need to, for their own sake, stop living stupidly while thinking that the government is going to somehow step in and save them from the holes they insist on digging for themselves. Those days be just about gone.
somebody here is a fool, but it ain’t those who trusted Social Security.
SS delivers exactly what it promises… insurance against the worst kind of poverty in old age. it won’t make you rich. but it has been delivering an effective interest of better than 2% “real” for the “richest” retirees, and better than 10% real for the poorest. Plus it is insurance against disability and death with dependents.
the “government” is us. But we pay for our own Social Security. and we get what we pay for. More than some people who think they are smart are smart enough to understand.
you were not exactly clear about how you were recommending poor people “save for their own retirement” given the inflation you are expecting, and the stock market we have seen.
magic gold coins under the mattress have we?
just to help you a bit. Social Security initial benefit is automatically adjusted for inflation by being adjusted for wage increases, which are due to inflation plus average growth in the economy. they are further adjusted by a payout formula that adds more to the savings of the poor than they could have gotten on their own short of winning the lottery. this is paid for by those who end up “rich”… but at a cost to them that is a reasonable cost of insurance against the chance that they could have ended up poor.
after that initial benefit computation, SS benefits keep up with inflation, arguably, by being inflation adjusted every year. there is argument about how accurate this adjustment is, with the Big Liars claiming it is too generous, because it does not allow for the fact that when the poor can no longer afford steak they can switch to cat food.
but in any case, the inflation adjustment is better than you can get for the price from any private pension. moreover, if the people would catch on… they could prevent the threatened “more accurate” chained cpi from becoming the new law.
i don’t think the people will catch on until maybe a few years down the road when they see its effect they will change the law back to something honest, and hang the people who enacted chained cpi.
Social Security has taken 12.4% of your taxable income since 1990, about 8% since 1980. Don’t be conned into thinking that you only pay 6.4% and your employer matches as that second 6.4% is money he would pay you were he not required to pay that part of your wage directly to the government.
Think of it this way, your employer doesn’t care who he has to pay your wages to, he cares about the total number. You, The Federal Government, some garnishment from a successful claimant against you ….. in terms of the total it’s all the same to him.
If you are able do a little arithmetic and guess at what you’d be worth had you simply put a little effort into your life and learned to chase some yield for your 8- 12.4%, it might start to dan on you the extent to which you got done. Government bond funds payed a ton in the 80’s, tech stocks roared in the 90’s (not much yield however), royalty trusts paid double digit yields in the first decade of this century. But you got your ‘guaranteed’ retirement with a COLA.
Now from the FAQ as SSA.gov
How is a COLA calculated?
The Social Security Act specifies a formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.
A COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.
And now, and my apologies as this next read requires a little effort on your part, a link to the primer at shadow government statistics.
The following comment will ofer up a taste from the above link.
The Way the Politicians Wanted It
In the early-1990s, political Washington moved to change the nature of the CPI. The contention was that the CPI overstated inflation (it did not allow substitution of less-expensive hamburger for more-expensive steak). Both sides of the aisle and the financial media touted the benefits of a “more-accurate” CPI, one that would allow the substitution of goods and services.
The plan was to reduce cost of living adjustments for government payments to Social Security recipients, etc. The cuts in reported inflation were an effort to reduce the federal deficit without anyone in Congress having to do the politically impossible: to vote against Social Security. The changes afoot were publicized, albeit under the cover of academic theories. Few in the public paid any attention.
Sam Zuckerman of the San Francisco Examiner, noted “In the 1990s, for example, Republicans wanted to make changes in calculating inflation along the lines recommended by a special commission, including more use of quality adjustments. By lowering the official inflation rate, such changes promised to reduce the annual cost-of-living adjustments for Social Security and other federal programs.
“[Katherine] Abraham, the Clinton bureau [of Labor Statistics] commissioner, remembers sitting in Republican House Speaker Newt Gingrich’s office:
“ ‘He said to me, If you could see your way clear to doing these things, we might have more money for BLS programs.’ ” [v]
Federal Reserve Chairman Alan Greenspan and Michael Boskin, the chairman of the Council of Economic Advisors, were very clear as to how changing or “correcting” the CPI calculations would help to reduce the deficit. As described at the time by Robert Hershey of the New York Times, “Speaker Newt Gingrich, Republican of Georgia, suggested this week that fixing the [CPI] index, with its implications for lower spending [Social Security, etc.] and higher revenue [tax bracket adjustments], would provide maneuvering room for budget negotiators …” [vi]
“Alan Greenspan, chairman of the Federal Reserve, is among the other Government officials who have spoken optimistically about financial benefits of a more accurate [CPI] index …” [vii]
“[E]conomists believe one of the most important [CPI upside biases] is when consumers shift their buying patterns in response to changing prices, substituting one product for another. The [CPI] index is based on a fixed market basket of goods and services. But, for example, if the price on an item like steak gets too expensive, consumers may switch to hamburger.” [viii]
The Boskin Commission Report, December 4, 1996, actually used steak and chicken for its substitution example. The examples used in arguing for changing the CPI clearly were tied to prices rising and resulting consumer demand shifting to a lower-quality product. Simply put, that was the destruction of the cost-of-maintaining-a-constant-standard-of-living issue and was the primary consideration of those seeking to change the CPI, although other issues would come into play. The drive here was as to get a lower inflation reading, irrespective of whether the data were “more-accurate.”
So you get it in the teeth thrice, 12.4% of your income is removed from you wallet in exchange for a promise of a retirement income with the implication that it will provide for a moderately comfortable retirement, whatever that means. Then the amount of the payout is methodically reduced by manipulation of the adjustment for inflation which is the very vehicle that provides for your comfort within your comfortable retirement, whatever that means. Finally you stupidly bite and fail to provide any savings for your retirement out of what income you have left thinking that your government actually gives a rat’s ass about you.
You got used. The day you retire, you are of little use as you now draw on government accounts rather than pay in. Your death will be viewed by your government as a good thing. Hurry up and die. Disease, malnutrition death panels ….. it’s all the same to your Uncle Sam.
As an aside while it was Ol’ Newt promoting the idea in a meeting, it was Clinton who signed on for the changes.
You are a “pie in the sky” believer if you think anyone’s employer would suddenly increase your pay by 6.4% if their share of SS went away unless they were required to.
Then, they would figure out some way to whittle it back down as soon as they could. And in any event, you are neither taxed on the employer’s contribution nor do you have use of it, so it is hardly ‘taxable income’.
you could leave off the snotty remarks. i was one of those shouting against the Boskin commission.
the 12% you pay for FICA is what gets the 2% or better real return on your “investment.” But it is not so obvious to me that the boss would pay “his” share if the bad old government didn’t force him to.
No doubt someone as smart and good smelling as you could negotiate for a 6% raise if the boss didn’t have to pay FICA. But i don’t think the eighty percent of us who are too stupid to know anything about investing would even get the 6% called “the workers share” if the bad old government didn’t force the boss to pay FICA.
It has something to do with the “power” of the parties at the bargaining table.
As for your take on “the government,” you know it’s who we vote for. I’ve been trying to get people to make it clear they won’t vote for anyone who cuts their SS… even in the name of a “more accurate” CPI.
Why don’t you join the country and work on making it work.
I happen to be one who appreciates your rehashing the bullshit that passes for elected representative activities in this country. Note that I use the phrase “elected representative” because your use of the word government is too amorphous and fails to draw the relationship between those whom we vote for and those who then screw the electorate in favor of their financial backers.
Given that you are so insightful regarding the inadequacies of the Social Security system as a back stop retirement vehicle for the masses I was wondering if you might fill us all in on the investment vehicle that you have discovered that guarantees a good return and safe haven for that 12.4% in extra take home pay that we are going to receive once the bad old SS system is finally put to the grave? Oh, and while you’re at it please explain how it is that you are so certain of the employer’s 6.2% reaching our pockets? I do admire a person with such a strong sense of certainty about so many uncertain and unpredictable phenomenon. I await with baited breath your explanation.
The BLS response to the Boskin Commission can be found here: http://www.bls.gov/pir/journal/gj10.pdf BLS professionals rejected the idea of replacing the CPI-U with the Chained-CPI–the “chicken for steak” problem. But they did make some changes to their methodology, with the net result of a slight decline in CPI-U estimates. Did the BLS go too far and begin underestimating inflation? Tough question and I’m not convinced by what John Williams says (and he should more carefully note which Boskin recommendations were rejected). Based on the BLS report in the above link, I think BLS professionals are reasonable and intelligent analysts who are trying to do a good job and beat back political pressures. I often bump into claims that the CPI-U overstates inflation and claims that it understate inflation–and they usually vary depending on the political motivation.
Buy a little silver if you can, beyond that you need to figure out for yourself how to handle your money.
I will tell you what not to own …… treasuries and most other government debt.
As for whichever of you thinks you aren’t getting taxed on your 6.2% the employer is forking over, THEY ARE TAKING 6.2% FROM TOU whether you call it a tax or something else, it’s coming out of your wage.
As for not getting your 6,2% from your employer should Social Security go away, there’s absolutely no danger of that happening, the government can’t even begin to think about maintaining the lifestyle to which it has become accustomed without sucking it’s FICA out of the chumps. The quest going forward will be to minimize repayment, this will be a bipartisan effort.
As for the more than 2% to more than 10% real yield, your are right, if you throw out the word real, if you live long enough to collect (if you don’t it’s a hundred percent loss) and if the government remains solvent enough to pay it (more than likely) and most importantly doesn’t continue to inflate the currency and thus deflate the value of your benefits down to the point where you have to choose between food and rent ((the most likely scenario).
Here’s your problem, the deal you made on Social Security is as follows; Ok you guys can have 12.4% of my money while I work, and then you have to take care of me when I retire. You trusted in the full faith and credit along with the integrity of the United States Government ….. bonehead.
Think of yourselves as the Indians of the 21st Century.
The Government took your money, spent it, and worse yet, borrowed against it and are now on a mission to see to it that they hold your benefits to the barest possible minimum. They keep you coming back for more by telling you that they’re now gonna give you “free” medical care. What you didn’t get was a definition of what it means to take care of you. And that’s where you are going to get screwed. But don’t worry too much, they’ll try to screw over that segment of the country that was able to save a little money at the same time they’re busy screwing you over by selling them treasury notes and bonds, or maybe attempting to nationalize IRAs and 401ks. You’ll be all for this mostly because these are “very risky investments” anyway, and more importantly you don’t have enough to care.
I’ll say it again, learn to take care of yourself and your own money because you are a chump in the eyes of the government.
Two problems with your conclusions about who to trust and how to save:
1) You. Can’t. Save. What. You. Can’t. Earn. Currently, half of Americans’ earnings are less than needed to live normally (maintain a home, raise children, etc) and also save.
2) Saving money or assets is also subject to financial rule changes, service charges, inflation and other depredations, if not outright theft.
I don’t know what your life situation is, but I am guessing you’re a youngish male, somewhere between 30 and 50. You’re not raising a disabled child. You’re not a stay at home mother. Your parents haven’t shown up at the door hoping to live in your basement. You feel secure in your job, your health and your profession. You probably have a good health plan.
In short, you have no clue as to how precarious your life situation is, and how little control you have over your security.
Most Americans’ homes are houses of cards, where the removal of one card brings the whole thing down.
A friend of mine had established a great career in Arizona, managing a chain of businesses whose value he had roughly doubled in the 7 years he was there. He had savings, good health care, a nice condo, big truck, the whole thing.
One heart attack and bypass later, he lost the job and the health care, a HUGE bill, despite the insurance he had, ate up his savings and pushed him into debt, he sold the condo (bye bye equity) and moved into a small apartment shared with a roommate.
Being a self-reliant fellow, he went back to school and is just finishing a business management degree with a 3.9 GPA. He would be an example to all Americans and to you too, I guess, if not for the fact that he was only able to go back to school because he was eligible for funding under the GI Bill.
The Gummint might not be 100% reliable, but God knows it’s shown itself far more reliable than the banks and stock markets where you want people to put their trust. Just wait till your first infarction, and see what happens to your life.
you know a little. and your opinion of the folks currently running the government is not very different from mine.
but you don’t know a lot, and your understanding of Social Security is worthless. SS is what has saved most old people from miserable poverty over the past seventy years.
i don’t think i’d trust that silver too much.
in any case, 90% of the people can neither afford the risk, nor understand the market. and what do you think would happen to your profit margin if they did?
the government is no more reliable that we make it. and folks like you who think you are smart… but are not… are helping bring about the bad government you complain about.
i am not trying to be insulting when i say not-smart. all human intelligence is far more limited than most people realize. you would be smarter if you realized how not-smart you (and I) are.
Alas Noni, I suspect that we are conversing with either a troll or a pig headed fool. Note that Roanman provides no hard facts to support the contention that savings can be kept safe and productive over the long haul. Roanman gives only lip service to the claim that employers will fork over the 6.2% that the Social Security Act requires them to do once that law is superceded by some self indulgent and misguided system of exclusively personal savings.
No one ever said that workers who can should not save for their own needs and future retirement. Intelligent long term financial planning requires a diverse “potfolio” of which Social Security is the only truly safe haven. The market for traded assets is subject to that invisible hand that sometimes giveth, but often taket away. I’m amused by Roanman’s reference to buying silver. He must have learned investment strategy at the feet of the Hunt brothers.
Roanman, In case this isn’t crystal clear I’m pointing out that you have completely neglected to answer my first critical statements. You simply repeated your own platitudes with still no corroborating evidence. Talk alone is cheap. Add some value to what you claim to know by providing substantiation of your claims.
We really need a “rec” button! And I’m not referring to Roanman’s posts. Noni points out what most of us know either from first hand experience, or someone we know personally. So many are one illness or accident away from total disaster.
that was what i was trying to tell roanman in my clumsy way.