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Who killed retirement security? If you look closely, it wasn’t the 401(k)

“America’s retirement savings system has failed,” famed financial planning author Jane Bryant Quinn has said — and she isn’t short of company.

Media articles regularly recount the ways in which Americans, burdened with the responsibility of saving for retirement through 401(k)s, fail to put enough aside for old age. In response, 84 percent of House Democrats have co-sponsored legislation to expand Social Security benefits, while states are hoping to establish their own retirement plans for private sector workers.

{mosads}But here’s the reality: private retirement savings are at record levels, and the uptick in saving began at precisely the time when 401(k)s began to replace traditional pensions. Yes, some Americans are undersaving. But by far the biggest risk to retirement security is underfunded government retirement plans, which have promised vastly greater benefits than they can pay.


Many Americans look back fondly on traditional “defined benefit” pensions, which offered retirees a fixed, guaranteed benefit for life. And they regret the shift to 401(k)-type plans, in which workers must choose investments, bear the risk, and decide how to spend down their savings in retirement.

But this nostalgia is misguided. Americans have saved far more for retirement in today’s 401(k) world than was ever saved under traditional pensions. Federal Reserve data tell the story clearly. In 1947, total savings in employer-sponsored retirement plans equaled 27 percent of gross domestic product (GDP). By 1975, when participation in traditional pension plans peaked, savings had risen to 57 percent of GDP.

But in the four decades since 401(k)s were introduced, total retirement savings nearly tripled to 157 percent of GDP. Participation is higher in 401(k)s, with 61 percent of private sector workers participating according to a Social Security Administration analysis, versus a peak of 39 percent for defined benefit plans. Vesting periods for benefit eligibility are shorter, and Department of Labor data show that cash contributions to private sector retirement plans have more than tripled as a percentage of salaries since 1975.

A 2016 Census Bureau study found that — thanks to a 75 percent increase in benefits from private retirement plans — incomes for the median new retiree rose by 58 percent above inflation from 1989 to 2007. Another new study, from economists at the IRS and the Investment Company Institute, finds that the median retiree has an income equal to 103 percent of their income just prior to retirement, far exceeding the 70 percent “replacement rate” that most financial advisors recommend.

Yes, Americans worry about a retirement crisis — but mostly for other people. When it comes to their own finances, three-quarters of retirees tell Gallup they have enough money to live comfortably. Likewise, in the Employee Benefit Research Institute’s Retirement Confidence Survey, only 9 percent of current retirees describe their financial situation as “poor,” while 75 percent describe it as “good,” “very good” or “excellent.”

Americans should worry less about what other people are saving and more about pensions that governments have promised but are unable to pay. According to Federal Reserve data, public employee retirement plans run by the federal, state, and local government have promised Americans $45 trillion in future retirement benefits.

But government employee plans only have $33 trillion in funding, leaving a $12 trillion gap. On top of these shortfalls, Social Security faces an additional $12 trillion-plus funding shortfall. If Social Security became insolvent, all bets are off: the 25 percent across-the-board benefit cut that would occur around 2030 would pummel middle-income retirees and crush the poor.

By contrast, Fed data show the private sector retirement plan funding gap is less than $500 billion out of $18.7 trillion in promised benefits. Why? First, traditional pensions in the private sector are much more tightly regulated than government plans, with tougher accounting and funding requirements. And second, unlike traditional pensions, 401(k)s can only promise what they can pay. There is a real threat to retirement security, but it’s not 401(k)s.

Yes, the federal government should make it easier and cheaper for small business to offer 401(k)s. But should we expand Social Security? Not before fixing its large and growing funding gap. Should state governments establish retirement plans? Not before addressing states’ own problems with excessive risk-taking in public employee pension funds, sometimes-high fees in state-run 529 college savings plans, and investment-related bribery scandals that sent the New York State Comptroller and the head of the California’s largest pension system to prison.

Reforms to the U.S. retirement saving system should build on what’s working and fix what’s not.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. A former Social Security Administration official, he currently serves on the Financial Oversight and Management Board for Puerto Rico and previously served as vice chair of the Society of Actuaries Blue Ribbon Panel on Public Pension Funding.

The views expressed by contributors are their own and are not the views of The Hill.

Tags 401(k) Americans Finance investing Money Pension Retirement Social Security

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