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Saving Retirement From "Bah, Humbug!"

2008 2009I was speaking at a conference in New York last week when a fellow panelist made a remarkable claim – the U.S. could no longer afford to provide the kind of retirement security middle class Americans came to expect in the post-World War II decades. 

The remark sounded very Ebenezer Scrooge...“Retirement security?  Bah, Humbug!”

I found this astonishing.  As any economist will tell you, our nation can afford everything we enjoyed in 1950 and more.  Our nation’s gross domestic product is roughly six times larger than it was in 1950 and household incomes have grown by a similar amount. 

Even in the midst of our current economic struggles, ours is still the richest society in all of human history.  But like Mr. Scrooge, it is the priorities we set, more so than the absolute level of our financial resources, that are the source of most of our troubles.

Indeed, even before the global financial meltdown, retirement prospects of many Americans looked grim.  Only about half of private sector workers had access to a retirement plan at work. Savings in 401(k) plans were woefully inadequate.  Private sector companies found it more difficult to continue even healthy pension plans due to accounting and funding rules that tilted playing field against traditional pensions.

But these challenges are less a reflection of what we can afford than they are of priorities we have set and past policy choices that have been made.

In 2009, sadly, it’s bound to get worse.  Although well positioned to weather this financial crisis, pension funds are not immune to market turmoil and are experiencing lower returns similar to other investors.  Some companies are “freezing ” their plans, which can have severe unintended consequences.

Further, the volatility of the stock market is devouring balances of 401(k) plans.  Younger workers may have time to recover, but experts question if it’s it possible for retirees and near-retirees to recoup their losses.  Some employers even are ending their matches.

And to make matters worse, those who do have individual savings are either reducing their savings or picking the lock on their retirement piggy bank as a new Bank of America Retirement Savings Survey found.

It is this state of affairs that has some observers – the “Bah, Humbug! crowd” – questioning whether a secure retirement for middle class Americans is just a dream.  If this view turns out to be correct, the “ghost of retirement yet to come” will become the “ghost of retirement never to be.”  

But some encouraging developments provide hope.  Congress is examining provisions to soften the transition to the new funding rules under the Pension Protection Act of 2006.  This could help soften the blow of the current economic crisis for employers that are trying to support their workers’ goals of a secure retirement.    

Also, our research tells us that the traditional pension system indeed does work in terms of providing adequate income so that retirees can be self-sufficient and maintain a middle class standard of living in retirement. 

Our research also tells us that the economic efficiencies embedded in pensions enable them to stretch the retirement dollar – they can provide the same retirement income at half the cost of an individual account. Now that’s an approach to financing retirement that even the penny-pinching Ebenezer Scrooge could love.
And with regard to public sector pensions, an analysis U.S. Federal Reserve and U.S. Census Bureau data released by NIRS indicates that public pensions followed well-established practices for prudent, long-term investing during the market plunge that occurred through 2001. Going forward, this is an indicator that public plans are well situated to recover from today’s financial crisis in a manageable way. 

If we look back to nation's darkest days of the Great Depression, we find the stimulus for one of the “crown jewels” of the New Deal:  Social Security. Although the system faces challenges, it remains widely supported and provides a regular and dependable check for Americans to help them retire with dignity.

What we need is a system that restores retirement readiness in a cost efficient manner:  rebuilding our nation’s pension system, strengthening individual savings, and ensuring all Americans have access to high quality, low cost retirement plans at work.

None of this will be an easy task. But the cost of inaction is far greater.  So, let’s hold out hope for better times to come, stemming from pragmatic policy changes to restore financial and retirement security for Americans. 

After all, if old Ebenezer Scrooge could realize the error of his “Bah, Humbug!” ways, then policymakers should certainly be able to craft a better vision of the future of retirement.

Posted by:  Beth Almeida, Executive Director, December 8, 2008