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.
It’s 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 don’t grasp the complexities of planning for retirement, and that’s to be expected.
“The system requires of humans things that humans just can’t 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.
“That’s something that each individual cannot be expected to do, but for a society, we expect all of those things. We expect that people don’t know how long they’re 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 that’s 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 can’t.
Many people are going into retirement with only Social Security, and Ghilarducci says it’s 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 don’t want to be realistic about the risk of illness and death. But Ghilarducci argues that people who think they will work longer probably won’t be able to.
“It’s magical thinking, but the solution doesn’t 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.
“We’re 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, we’re in a system where we, because we’re humane, won’t let those folks starve. I’m saying everybody saves on top of Social Security," she said. “Let’s all recognize that when we are living our lives, on top of that, we have to save for our retirement. That’s all I’m asking. That people save another 5 percent in a safe and secure investment vehicle."
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.
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