Would A Retirement Plan Overhaul Fix Our Savings Shortfall?

For the past several decades, financial experts and researchers have repeatedly warned the American people that they are not saving enough for retirement, and this problem has continued to worsen in the wake of the Subprime Meltdown of 2008 and the Great Recession. Although the markets rebounded strongly in 2013, several prior years of poor performance and low interest rates have decimated many retirement plans and accounts, and current budgetary struggles at both the state and federal level have made the prospect of public retirement funding that much more difficult. But while the government and the financial industry both agree that substantive action needs to be taken, a viable solution has remained elusive.

Our Current Plight

A study published by the Center for Retirement Research in 2010 revealed that America’s personal retirement savings shortfall then stood at a whopping $6.6 trillion. The Retirement Confidence survey put out by the Employee Benefits Research Institute also shows that the fraction of U.S. households that are saving for retirement has fallen from around three-quarters in 2009 to approximately two-thirds in 2013.

A recent study by Hello Wallet also outlined that over three-fifths of households that had a defined contribution plan accumulated more debt than they contributed to their plans between 2010 and 2011. A third of this debt was credit card debt, another third was from mortgages and the balance was from other types of consumer or installment debt. In fact, the total amount of debt payments owed each month by retirement savers aged 50 to 65 grew by nearly 70% between 1992 and 2010.

Many other publications and professionals also cite similarly bleak statistics. In a speech to the Stern Business School at New York University, Larry Fink, chairman and CEO of BlackRock, Inc. (one of the world's largest asset management companies), lamented the demographic effects of improved healthcare, saying that “longevity is the defining challenge of our age.” He added that our current retirement system is in the throes of a “systemic crisis that is threatening not only retirement systems but our economic futures.”

Possible Solutions

The solutions that we have to choose from fall into one of two main categories. The first course of action is to increase our personal rate of saving, while the other avenue would be substantially to strengthen the Social Security system. Larry Fink has endorsed some form of mandatory retirement savings program, in addition to Social Security that could be gradually phased into our workforce. In this proposed system, workers could make additional elective contributions. There are pros and cons to both ideas, and many experts recommend that some combination of these two possibilities be implemented.

Increasing Retirement Savings Rates

A few halting steps have already been taken towards raising the rate of retirement plan contributions, starting with automatic 401(k) enrollment. But instituting a widespread enrollment increase will be a daunting task. Although about three-quarters of employer matching contributions have resumed in the U.S. since the Subprime Market Meltdown of 2008, workers are still that much further behind in their savings plans. And the savings for minimum wage and lower-class workers under this type of program would likely not even begin to cover their monthly retirement expenses. While there is legislation pending as of 2013 to move this idea forward, many experts have serious reservations about its effectiveness, citing examples in other countries such as Australia, where many workers opt to buy out of the system when they retire and choose to take the pension benefit instead.

Fixing Social Security

The Social Security trust fund is currently scheduled to deplete in about 2037, and the debate has raged for decades over how to best fix our Social Security system. Some have advocated privatizing this system by moving each participant’s contributions into private accounts that invest in stocks or other securities. However, other pundits are wary of placing this much faith in the markets. A major downturn could have a substantial adverse impact on retirees, and Social Security has always been a source of guaranteed income that can help investors to weather market volatility. Other solutions include raising the retirement age at which benefits are paid, raising the Social Security wage base, decreasing benefits and increasing contribution levels.

Retirement USA

A relatively new organization is seeking a solution to the retirement savings shortfall in America. Retirement USA was formed in March of 2009 through a coalition of The American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), the Economic Policy Institute (EPI), the National Committee to Preserve Social Security and Medicare (NCPSSM), the Pension Rights Center, and the Service Employees International Union (SEIU). They also have a long list of supporting organizations, including the Alliance for Retired Americans (ARA), the National Senior Citizens Law Center (NSCLC) and This group is actively lobbying for a new retirement savings program that is founded on 12 principles:

  1. Universal coverage for every worker

  2. A secure retirement with a guaranteed stream of income

  3. Adequate retirement income for life

  4. Shared responsibility for the cost between employers, employees and government

  5. Required contributions from both employers and employees, with subsidies for low-income workers

  6. Contributions should be pooled and professionally managed

  7. No payouts until retirement for any reason except permanent disability

  8. Guaranteed lifetime payouts for workers, spouses and partners

  9. Portability of benefits that allows workers to move their accounts between employers

  10. Optional additional voluntary contributions by workers

  11. Efficient and transparent administration and management of funds

  12. A governmental regulator that oversees the entire system

This group is entertaining several different proposals for a second public retirement savings system that would supplement Social Security. All of these proposals embrace the 12 principles in varying degrees, but the group has not decided on a single course of action at this point. They did say the recommended course would exclude pensions that are adequately funded from whatever system it decides to adopt. The new system will also not replace other traditional defined-contribution savings plans or accounts.

What You Can Do

While the forecast for retirement in America remains rather gloomy, there is still much that you can do to prevent yourself from becoming another unfortunate statistic. But it may not be fun or easy. One of the key steps that you should start with is to carefully examine your current standard of living and see whether your current savings and Social Security will sustain that for you after you stop working. If not, then you may need to consider downsizing your house or cutting back other elements of your lifestyle. Working longer is another viable alternative, especially since it may delay you having to purchase individual health insurance and delay taking Social Security benefits. Even a part-time job can greatly reduce the amount of savings necessary to live after you are done with your current job. Other obvious solutions include reallocating your assets into a more aggressive portfolio and deferring taking distributions and increasing your contribution rate.

The Bottom Line

There are no easy solutions for Americans when it comes to saving for retirement. Government and private industry will have to collaborate with the American people to reach a workable solution. But from an individual standpoint, employees and others facing retirement need to carefully assess how far their retirement savings can take them so that they can see where they need to make adjustments. Those who are far behind in their savings plans may need to work a few more years and possibly delay collecting Social Security in order to rectify their shortfall, while diligent savers may only need to make an occasional adjustment to their portfolios. Consult your financial advisor for more information on what changes you may need to make in your asset allocation or contribution levels in order to achieve a comfortable retirement.

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