How do you solve a problem like retirement (policy)? – Carosa

Everyone agrees there’s only one thing worse than a 401(k) plan – not having a 401(k) plan. If that sounds obvious to you, you may have discovered the source of the debate on retirement policy.

Teresa Ghilarducci, known for her criticism of how the 401(k) has been delivered to employees, has her own thoughts on how to improve retirement (see “Exclusive Interview: Teresa Ghilarducci Worried About de facto Poverty in Future Retirement,” FiduciaryNews.com, February 21, 2019).  It’s important you understand her ideas, not necessarily because you should or shouldn’t agree with them, but because they will stimulate your own thinking.

And exactly what thinking should be stimulated?

Let’s consider what Ghilarducci says. She believes we’re heading towards a retirement crisis, but not for everyone. That’s an important point. Why? Because it causes you to consider why some are headed in the right direction. What are they doing right? What allows them to do it right? How can their ways offer a guide we can replicate for others?

Clearly, in her criticism of the 401(k) industry, she implies an optimal plan design exists. It may not be the ideal solution to her, but it represents the best achievable practice given current retirement policy. Are we striving to move all 401(k) plans closer to this optimal design? If not, what’s holding us back? How can we overcome these obstacles?

Americans, if nothing else, are a resilient bunch. They have demonstrated they can change and adapt to whatever slings and arrows outrageous fortune hurls at them. Studies show those who have yet to retire are more anxious than those who have already retired.

You might say this is anecdotal and that it doesn’t prove much. Actually, while that may be the case, it would still be better than the real story. As recently as a 2013 Gallup survey and a 2018 IRI report, it appears current retirees may have less worries because they benefit from the last vestiges of the corporate pension plan era.

This implies younger generations won’t have the same breadth of income sources in retirement. They will only have their own savings – namely their 401(k) plan – to support them. And Social Security. And if they don’t have a 401(k), then it’s Social Security alone.

What does this mean? The 401(k) plan is approaching its 40th anniversary. As a result, in the next five or ten years, we’ll see baby boomers retiring who have contributed to their 401(k) plan their entire career. Presumably, these retirement plan accounts should represent the maximum savings amount. Will that be enough for their owners to retire?

Finally, what about Social Security? The government says it will go insolvent in fifteen years. Now, let’s not get into that mess right now. Let’s merely assume the worst for a moment. If we can’t rely on Social Security, what happens? Will some future administration mandate that all those who aggressively saved for their own retirement must now cede a portion of their savings to those who didn’t?

Now let’s not assume the worst for Social Security. Let’s assume it’s merely taxed away for those who have saved “enough” for retirement – but only for those born after 1970 (that’ll buy us some time). This implies anyone under the age of 50 has at least 15-20 years to save “enough” to avoid the need for Social Security. Will the existing retirement plan “catch-up” provision be enough? What can we put in place to help boost their retirement savings? Can companies enact compensation policies to facilitate accelerated retirement savings for employees over 50?

Finally, rather than focusing on the near-term problem potential (i.e., for those 50 and older), what if, instead, we began to look at the potential long-term problem. In other words, how can we help solve the retirement crisis by focusing on those under 30? How about those under 20? What if parents and grandparents could help their minor children and grandchildren begin saving for retirement?

How do you solve a problem like retirement? There’s a different answer for each generation.