The Retirement Wheel of Fortune

The ongoing recession has eliminated at least $2 trillion in retirement wealth held in defined-contribution retirement savings vehicles like 401(k) and IRA plans. By undermining the economic security of many people at or near retirement age, the evaporation of retirement wealth illustrates the silliness of entrusting social insurance to financial markets.

Amazingly, the United States lacks a coherent retirement policy. While most workers are eligible for Social Security payments, these modest benefits never were designed to be a household’s only source of retirement income. Ideally, they would be augmented by individual savings and employer-sponsored benefits. Since the late 1970s, defined-contribution plans like 401(k)s have become corporate America’s preferred retirement savings vehicle since these plans are inexpensive and absolve firms of any risks.

For employees, however, the change has been less beneficial. In exchange for short-term tax breaks, individuals assume all the risks of planning and financing their retirements, but as a recent article in The Wall Street Journal reported, success depends largely on the whims of the market. Writes the Journal:

Even if workers follow the golden rules of 401(k) investing — saving early and diligently, holding a broadly diversified investment mix, never tapping their savings until retirement — their success can still depend largely on the luck of the stock-market draw.

And this is just one flaw of 401(k) plans. Another is that firms are not required to offer plans at all. In fact, just 43 percent of American workers in the private-sector were covered by a employer-sponsored retirement plan of any kind in 2005-07 (40 percent in North Carolina). And most people who do have plans have small — and shrinking — balances. Moreover, the associated tax benefits do little to help lower-wage workers save.

Clearly, America’s 25-year experiment with market-based retirement systems has failed the nation’s families. The time therefore is ripe for reforms that produce a coherent system that ensures that individuals who work hard will be able to enjoy a decent retirement regardless of the state of the NASDAQ.