Skip to comments.Economist Says the American Retirement System Has Failed(mandatory retirement savings)
Posted on 08/16/2012 3:24:08 AM PDT by Son House
America is heading into a retirement crisis, an economist says. Most retirees haven't saved enough money to retire and Teresa Ghilarducci blames America's entire system for retiring.
Its been 30 years since the Individual Retirement Account model became the standard way for Americans to save for retirement.
But many people who saved for three decades watched a lot of that money disappear during the financial crisis. And now, more than half of American workers have saved less than $25,000 for their golden years, and about 30 percent have saved less than a thousand dollars.
Overall, the system is failing, says Teresa Ghilarducci, professor of economics at the New School for Social Research.
In a commentary in Sunday's New York Times, Ghilarducci argued the 401(k) savings account, which puts the responsibility for saving on the future retiree, no longer works. She said most Americans dont grasp the complexities of planning for retirement, and thats to be expected.
The system requires of humans things that humans just cant possibly be expected to do, Ghilarducci said.
The 401(k) model expects individuals without investment expertise to reap the same results as professional investors or money managers, she writes. What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?
Ghilarducci said that what people are expected to do goes beyond knowing the difference between a stock and a bond and a risk and return trade-off. For an IRA to be successful, retirees must accurately predict when they will stop working, and even when they and their spouses will pass away. For this reason, Ghilarducci argues, no amount of financial literacy courses will make people succeed in retiring comfortably.
Thats something that each individual cannot be expected to do, but for a society, we expect all of those things. We expect that people dont know how long theyre going to live, we expect that people will get divorces, that kids will need education, that people will lose their jobs. As a society, we know those risks happen, and thats why we have insurance against those risks as a society, Ghilarducci said.
Social Security serves as an insurance against those risks as a society, but Ghilarducci said individuals are also expected to insure against these social risks, and they cant.
Many people are going into retirement with only Social Security, and Ghilarducci says its just not enough.
Most couples in the first phase of retirement, have social security, personal savings, their home and credit cards to get them through. Ghilarducci said that around the age of seventy-five to eighty-five, sickness could wipe out a great deal of personal wealth.
According to Ghilarducci, many people enter a third phase of retirement alone after the death of a spouse, which leads to a greater risk of poverty.
After 85, you see people at a much greater risk of poverty than they ever have been in their whole lives. And many times, these are single women. So we have a system that practically guarantees that aging will be a gateway to poverty, Ghilarducci said.
She said the risk of poverty is quickly filtering up to the middle class because the recession has wiped out the retirement savings of many people approaching retirement.
The problem is what Ghilarducci calls magical thinking," in which people think they can work forever and dont want to be realistic about the risk of illness and death. But Ghilarducci argues that people who think they will work longer probably wont be able to.
Its magical thinking, but the solution doesnt fall on people just knowing more or being more realistic. We need an expanding social security system that expects people to just be human beings, live their lives responsibly, Ghilarducci said.
She added that for the past 30 years, the system has expected people to keep their job for 42 years, never get a divorce, get sick, become disabled or have children who need assistance.
Were finding in our data that for most people it has not worked out. Most people have nothing, she said.
According to Ghilarducci, the system is not changing and evolving quickly enough to adapt to the changing society, and Social Security is in dire need of an expansion to make it mandatory that people save personally for retirement. That money would be a supplement to Social Security.
The system requires that people voluntarily save for it. Some people buy those lattes and vacations, and the other people save. And now, were in a system where we, because were humane, wont let those folks starve. Im saying everybody saves on top of Social Security," she said. Lets all recognize that when we are living our lives, on top of that, we have to save for our retirement. Thats all Im asking. That people save another 5 percent in a safe and secure investment vehicle."
According to Ghilarducci, the system is not changing and evolving quickly enough to adapt to the changing society, and Social Security is in dire need of an expansion to make it mandatory that people save personally for retirement. That money would be a supplement to Social Security.(after the election...)
Vice President Joe Biden floated the idea, called Guaranteed Retirement Accounts (GRAs), in the February Middle Class report.
She has been humpin' this GRA concept since before the 08' election, and all the major inside the beltway investment adviser magazines covered it.
I got to give this commie progressives an "A" for persistance.....
Actually. If idiots like you hadn't help mess up education and screw up society humans would grasp this concept quite well.
All though I can't say what her stances are on other issues, but people like her are the same idiots that advocate Gov't spending and debt to get the economy going, tell people to SPEND to help the economy, then turn around and suggest ideas like this.
Thomas Sowell is right, these people get away with shaping society and hold no liability in doing so.
What part of Social Security failed? The mandatory savings on my part or the excessive plundering and spending on their part?
Read between the lines of the above article and you will see someone who wants to take away the assets of those who do have a decent 401/IRA and split them up among everyone. Private retirement accounts are the last big pot of money .gov hasn't gotten it's hands on.
If you have a successful 401/IRA, you have been warned.
And yes, Teresa, some of us do our own electrical wiring.
Put half of each person’s SS taxes in a personal retirement account, and we’ll have hit her admittedly modest savings goal. Converting SS into a fully funded system based on personal ownership, savings, and investment should still be the goal.
Ahh. From the NYT, of course. And again, people can't possibly have the knowledge to fend for themselves.
Only the government can do it. These people make me want to puke. A pox on ALL of them.
Yep. Great passage in his excellent book "Basic Economics". Give a way lots and lots of goodies today to get votes, rape and pillage the economic landscape of the future for some votes today, even get buildings and highways named after you, then run.
When the butcher's bill comes due in the future, they are long gone and forgotten. Nobody remembers who they were, and if they do, they are remembered for "helping their fellow man".
If one starts saving as a young adult, you don't need a lot of sophisticated investment strategies to try and make up for lost time. I don't think most people start worrying about retiring until mid 40's or early 50's. By then it is too late unless one can squirrel away 50% of income..
You can save your ass off, but with savings accounts and CD’s paying 0.10 % on your money it aint going to be enough.
Exactly. The second thing that needs to be done is to eliminate all taxes on interest and dividends. Our tax policies have made us a nation of spenders as there is no near term incentive to save. In fact, saving is penalized.
How much of this mad consumerism and inability to plan for the future is a result of the natural preference for the here and now as opposed to the future and how much is driven by a government school system designed to create consumerism?
Schools work to make kids dumber so that they can becomes pawns to business and political management. The goal isn’t liberty, but control.
She’s back by design. IMF head Christine Legarde,Fed Chairman Ben Bernanke and International Unionist Leo Gerard,are in the process of collaboratively helping to deliberately collapse the world economy for Obama and the Oligarch’s. When that happen’s,Obama is going to use that as an excuse to commandeer all savimgs and 401k retirement plans and replacing them with the GRA’s. They are planning on collapsing the economy soon. It’s no coincidence she is popping her head up now.
Right now the federal government does everything in its power to crush retirees. Interest rates on savings are essentially zero while inflation removes several percent every year. Active speculation with retirement savings is the only way to fight inflation - with the potential of serious investment losses late in life with no time left to wait for the markets to turn around. I guess the only thing left is to just steal whatever savings have managed to survive their attacks.
The government schools are godless in their worldview. Children who attend must think and reason godlessly just to cooperate in the classroom. So?...If there is not God, and no afterlife, of course there will be focus on merely the present satisfaction of wants.
Government schooling is not now, and never was, religiously neutral because a religiously, politically, and culturally education is impossible. And....The consequences of government education are not neutral either.
“Right now the federal government does everything in its power to crush retirees. Interest rates on savings are essentially zero while inflation removes several percent every year...”
You’ve zeroed in on the real reason right here. Government sets it’s own interest rate by buying the bonds with the left hand that it’s right hand is selling - all so it can keep borrowing and spending at an artificially low cost.
If forced (like it eventually will) to borrow at a market rate, retirees would be able to do just fine.
However, in the artificially low interest rate environment another oddity surfaces: That nearly every federal retiree - even on the lowest rung - is a defacto millionaire - because it requires millions in principal at low interest rates to generate the income a federal retiree receives. A cost which further requires the government to fake the interest rates lower.
Every fireman, every policeman, every bureaucrat, every government functionary is a millionaire. The people that pay for it all are mere serfs to do their bidding.
You want class warfare - that’s where you’ll get it for real. Producers vs. takers.
the tech bubble popping is what destroyed my parents retirement savings.
“How much of this mad consumerism and inability to plan for the future is a result of the natural preference for the here and now as opposed to the future and how much is driven by a government school system designed to create consumerism?”
The problem is more on the government side, than the government school side. If anything a dumber citizen is qualified for little more than some sort of government job - which, ironically, is the “smart” move when government penalizes folks who produce to pay for the folks who do not produce.
Back in 1986 we threw $2,000 in my wife’s IRA Dreyfus Fund which tracked the Dow Jones. Last week we cashed it in for $13,234.30. An average annual return of about 7%.
However, as of December 31, 2007 the Fund had a value of $13,200, having earned an average return rate of about 9%. BUT as of December 31, 2008 the value of the Fund had dropped to $8,140, a drop of more than $5,000, 38% in one year!
You put your money in and you take your chances.
Right. Fidelity, Schwab, Morgan Stanley, et al don't have any financial expertise to offer their customers. And your company investment plans don't have financial advisors and counselors come visit regularly to discuss your financial plans.
That sentence alone gives away the author...you are in incompetent boob who cannot manage your own life. Better let the elite intelligentsia who graduated from Yale and Harvard and now work for government manage that part of your life for you. The same boobs who have run up $16 TRILLION of acknowledged debt and $222 TRILLION of off-balance sheet debt.
Hopefully it is not going to be like that forever. For someone that is young and in a low tax bracket, they should be putting everthing they can into a Roth IRA..
Don’t forget that 0.1% is the nominal return. The real return (accounting for inflation) is NEGATIVE 3%/year. In a short 23 years, HALF of your savings are wiped out. At 5%/year, it takes only 14 years and, after another 14 years, you are left with 1/4 of your initial stake.
My take is slightly different. There's two parts to retirement savings--those that are already accumulated, and those that will be saved going forward.
The government can "tap" those through increasingly onerous restrictions and penalties (early distributions, late distributions, overly large distributions, insufficient distributions, increased estate taxes, etc).
I think that Teresa's aiming at the second part--future contributions. She will force them to be made, and you can bet that they will be invested in something "safe", i.e., US Treasury Bonds. In other words, a new pension income stream will be created, and used to fund government programs.
If you had invested that same $2000 in a simple savings account, or in very safe bonds, you would STILL have greatly outperformed social security. IF there was no tax on the earnings.
Leave people’s money in their own hands and let them determine the level of risk they want to take.
You all just nail it, I’ll have to read again later, but am sure grateful to be availed to someone besides a Democrat Economist, too bad a great many Americans won’t have this truth and guidance, and some that could, prefer the security of willful ignorance.
Let's not be like the liberals and pretend that we can have our cake and eat it too.
I believe we have recently crossed-over to the point that one-hundred percent of SS taxes are distributed as benefits to our present retirees. The only way to put the sum you mention into an individual account would be to raise SS taxes by 50%.
Young people would be well advised not to fall for such a trick. All these programs start out well-meaning enough, but government controls ensure failure.
So-called "safety nets" encourage people to behave in ways that they would never imagine if not for the net. Youngsters need to see irresponsible elderly people suffering for their mistaken ways. Only when there are personal consequences for personal misbehavior will people pay attention.
I am not willing to let the dems play poison the well politics and foreclose constructive structural reform. The transition to a fully funded system would have been easier when SS was still running a surplus, but there would have still been a long-term challlenge of amortizing the unfunded liability. And now the hill has gotten steeper. But a fully funded system is still the way to go.
The alternative is to borrow ever more simply to prop up a bankrupt system that pays a pitifully low — and for many participants, a negative— rate of return.
I do not subscribe to the view that Social Security is now too bankrupt to fix, so we must plunge blindly along shovelling good money after bad.
For later reading.
I think the two of us have a fundamental difference of opinion regarding the role that government should play in people's retirment planning.
What is it that you believe justifies ANY role for government? What principle do you use to limit that role?
Isn't it the case that any government role is enforced through use of coercion and that such coercion always reflects that the government is forcing someone to do something that they would not willingly do?
some years ago a commenter at an excellent blog, not my own
(I have none) remarked: Real savings requires avoidance of
1. taxes 2. inflation 3. risk. Think about this before
you blame the individual, although there’s much to be
critical about there.