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401(k) Savings Coming Up Woefully Short for Retirees

One of the major side issues in the Wisconsin public employees fight is the role of public pension obligations. It’s not really the main issue, since Wisconsin labor officials have agreed to all of the pension concessions which Governor Walker has sought. The idea here is that state workers don’t “deserve” these generous pensions, and they always cherry-pick some chief of police or city administrator taking home a six-figure annual pension to make the point.

First of all, the average Wisconsin pension is $24,500, so that’s a red herring. Second, to the extent there are problems with state public pension funds, it’s the result of something you might remember called the financial crisis, which led to a broad stock market crash. That has basically turned around now but has led to major losses for pension funds. Third, most public employees with public pensions don’t pay into Social Security, so this is all they’ve got.

And most important, there’s an entire mindset that needs to be changed here. The argument starts from the proposition that defined-benefit pensions are somehow illegitimate, and I would argue the opposite. Traditionally, there’s been a three-legged stool for retirements: personal savings, Social Security, and pensions. Social Security is still going strong, although forces in Washington want to weaken it, but that’s just part of a retirement plan. Personal savings have tanked over the last decade, tracking the reduction in average wages. People went into major debt to keep up with goods and services and obtain a reasonable standard of living. Savings rates are starting to creep back, but a lot of that goes to debt service. So between Social Security and savings, there’s very little margin for the average worker in retirement.

That brings us to pensions, the third leg of the stool. Since the 1980s, employers have switched over from a defined-benefit pension (like what public employees get) to a defined-contribution pension like a 401(k) plan. The individual manages the money and employers provide matching contributions. While this works out very well for the money managers being paid to make transactions and manage accounts, it doesn’t work out so well for the workers. Facing a volatile stock market and without the information needed to take advantage of opportunities, they made little use of their money. And the generation that’s on the cusp of retirement, the first generation to have a large majority of 401(k) plans, doesn’t have the money they need to live:

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

This analysis uses estimates of 401(k) balances from the end of 2010 and of salaries from 2009. It assumes people need 85% of their working income after they retire in order to maintain their standard of living, a common yardstick.

Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined.

This is leading to workers taking part-time jobs in their 70s, or drastically reducing their standard of living. Their 401(k) plans will not allow them to stay afloat. Even as the stock market has rebounded, many took all their assets out of stocks after the crash, missing the rebound entirely. This kind of risk doesn’t lead to good decisions, and it should have no place in the money that is earmarked for retirements.

And so when you hear all this demonizing about public pensions, understand that this is an effort to undermine the only stable piece of retirement security left for Americans. The Wall Street-led way of doing this has failed the current generation of retirees. Elderly poverty statistics are going to shoot up in the next decade because of this. It’s simply not true that we should scale down pension benefits for one class of workers; we need to scale up those benefits for everyone else. Otherwise, we’re going to have a rapidly growing class of elderly poor people in America, with reduced living standards and an inability to contribute to the economy through consumer spending, which you’d think the corporations would figure out.

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David Dayen

David Dayen