AM: Yes. The National Retirement Risk Index published by the Center measures the percentage of working age households who, at retirement, are at risk for not maintaining their pre-retirement standard of living. Using a lot of conservative assumptions, we found that based on 2004 data, 43 percent of households were at risk. After the stock market crash and the economic collapse two years ago, 51 percent were. That’s an extraordinarily high number.
TL: Social Security was always considered one leg of the three-legged stool of retirement income. Can people count on help from the other two legs—private pensions and personal savings?
AM: Not really. Let’s first look at employer-sponsored pension plans. At any one moment in time, only half the people in the private work force has any pension plan like a defined benefit plan or a 401(k) plan. Pension coverage is much higher in the government sector where about 80 percent of workers have a plan. The percentage of workers with any type of employer-sponsored pension has not changed, but the nature of the plan has changed dramatically.
TL: How so?
AM: We’ve gone from defined benefit plans that pay a benefit for the life of the retired worker to 401(k) plans where people accumulate a sum of money and are responsible for providing their own retirement income.
TL: Is that a bad thing?
AM: Yes, that’s a bad thing. I’m not saying defined benefit plans were perfect. You had to stay in a job a long time to get the full benefit and that doesn’t happen anymore. But defined contribution plans have a serious drawback, in that they transfer all risk and responsibility to the individual workers, and people make mistakes every step along the way, from failing to participate in a plan, to investing unwisely, to trying to manage their own lump sum in retirement.
TL: Isn’t a 401 (k) plan a type of defined contribution arrangement?
AM: Yes. It is a unique kind of defined contribution plan that shifts risks and financial decisions from employers to employees. When they were first introduced, 401(k) plans were meant to supplement defined benefit plans. But now they’ve become the dominant kind of pension. They really were designed for another purpose.
TL: Why did defined benefit plans disappear?
AM: Before 2000, employers did not get rid of these plans, but they began to disappear because they were predominant in declining industries. After 2000, it was another story. It was the perfect storm—declining interest rates and a declining stock market and an increase in the plans’ liabilities that required employers to increase their contributions. Instead of doing that, they froze the plans, and that meant workers who had them could no longer accrue benefits. So 401(k) plans became the only type of plan for millions of workers.
TL: How much money on average do people have in 401(k) accounts?
AM: Before the crash it was about $70,000 for those nearing retirement.
TL: Is that a lot considering a family’s retirement needs?
AM: No. People who don’t have much money see it as a big pile, but as a stream of money to support you in retirement, it is not. When you convert that average amount into a joint-and-survivor annuity where the surviving spouse gets the full benefit when the other dies, it works out to about $338 a month for a sixty-five year-old man and a sixty-two year old wife who are annuitizing their 401(k) money today. If the man were to take a single life annuity, his widow would get nothing, but the monthly payment would be only $100 more, or $438. That, plus an average Social Security benefit of about $1100, wouldn’t give the family much to live on unless they had additional savings.
TL: What about savings outside a 401(k) plan? Do people have much?