We’re not even a week into 2017, and we already have another reason to feel gloomy about our futures. The Wall Street Journal’s Timothy Martin tracked down several early proponents of the 401(k) and asked them what they think of their innovation, which has supplanted the traditional pension at most companies. Answer: not much!
Herbert Whitehouse, a former Johnson & Johnson human resources executive who pushed the then-new savings vehicle in the early 1980s, now says even he can’t retire until his mid-70s if he wishes to maintain his standard of living, because, Martin writes, his 401(k) “took a hit” in 2008. He’s 65. And Ted Benna, the man most frequently credited for the 401(k) as we know it, says he doesn’t believe “any system currently in existence” can help most Americans finance their financial needs in retirement. Oof.
What went wrong? The 401(k) began as a technical adjustment to the tax code, one meant to mostly impact high-earning executives using profit-sharing plans. People like Benna, a benefits consultant, convinced the Reagan administration that the language of the statute allowed for all employees to put aside a portion of their salaries on a tax-deferred basis. It was supposed to supplement corporate pensions. Instead, in something almost no one foresaw, the 401(k) replaced them.
In 2017, we know that this historic accident isn’t working out for many people. The Center for Retirement Research currently estimates that about 52 percent of households are “at risk of not having enough to maintain their living standards in retirement” with “the outlook for retiring Baby Boomers and Generation Xers far less sanguine than for current retirees.” The Economic Policy Institute says just under half of households headed by someone between the ages of 32 and 61 have nothing saved for retirement.
Some, like noted economist Richard Thaler, see a simple fix to the 401(k) savings problem:
The sad thing is we know how to fix this. Auto enroll. Auto escalate. Company match. Low fee default. Offer to employees w/out plans. Do it! https://t.co/hwHxm54MLY— Richard H Thaler (@R_Thaler) January 3, 2017
Unfortunately, it’s more complicated than that. Many companies already do auto-enroll their workers, but as of now employers aren’t required to even offer a 401(k) and they’re certainly not required to offer a match—and if they do match, they can stop at any point. Given the political climate in Washington, it’s hard to believe any of that will change soon.
How much needs to be set aside is also an issue. At the beginning of the 401(k) revolution, many employees were told 3 percent of their incomes would be perfectly adequate, as the Journal article reminds us. More recently, some, like Cindy Hounsell at the Women’s Institute for a Secure Retirement, have said as much as 15 percent. Since Americans currently put aside about 5.5 percent of their incomes, this presents something of a challenge. If hectoring people to save more worked, surely it would have by now. But it’s not like Americans are wasting it all on lattes. The New York Post, which isn’t exactly known for left-wing agitprop, reported last summer on a survey from America’s Research Group that claimed 20 percent of Americans can’t afford to buy anything but basic necessities. Others are putting their money elsewhere. The cost of child care has run double that of inflation since 2009. People who visit an in-network hospital emergency room run a 1-in-4 chance of getting hit with a surprise medical bill. So-called gray divorce can destroy even a well-planned retirement. Just under half of all households claim they couldn’t come up with $400 in an emergency without borrowing it. You get the idea. Saving for retirement isn’t simply a matter of willpower, or some behavioral finance trick. Life has become too expensive for many of us to save adequately.
I wouldn’t expect much help in the retirement department from the incoming Trump administration. The president-elect campaigned on a promise that he wouldn’t touch Social Security, but has since surrounded himself by people committed to cutting the program. (And his own track record in the 401(k) arena doesn’t exactly shine. According to BrightScope, the average account balance at Trump’s company is $26,000. And this is an improvement. Workers at Trump’s casinos who invested their 401(k)s in his stock—something at least 400 of them did—experienced huge losses when the companies went bankrupt.)
And things could get a lot worse. Recent research from noted economists Lawrence Katz of Harvard and Alan Krueger of Princeton found that almost all the job growth in the United States between 2005 and 2015 came from temporary or freelance work, which generally doesn’t offer stability, never mind access to 401(k)s with generous employer matches. And people like Whitehouse who think they can remain in the workforce well past the traditional retirement age could be in for a shock. About half of Americans retire before they plan due to circumstances outside of their control. And that’s before we get into technological progress doing away with many jobs—like, say, Uber driver—entirely.
We need to think about what comes next for retirement savings. Martin’s article mentions various initiatives: state attempts to set up retirement savings options for people without access to them at work; longtime 401(k) critic Teresa Ghilarducci’s idea for a mandatory savings plan, in which the money would be collected by the government and managed by financial pros; and Marco Rubio’s now never-discussed plan to open the federal defined contribution system to people who don’t work for the government. But the Journal forgets about the most common-sense suggestion of all: increasing Social Security payments.