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Pension Meltdown
America's Pension System is Failing Those Who Need it Most
Photo courtesy Shutterstock

Photo courtesy Shutterstock

America has an increasingly dysfunctional system for providing old age pensions. In terms of what the federal government does for the population at large, there are three major features: Social Security, Medicare and the programs of tax deferred savings that allow people to set up 401(k)s and other vehicles. They are all flawed, and together they don’t add up to a comprehensive program for the people most at risk. As this Washington Post piece tells us, African-American and Hispanic workers are even worse prepared for retirement than the population at large: less than 50 percent enjoy any sort of on-the job retirement plan, and many do not have enough money of their own to save a significant amount outside of work.

Each of the pillars has a different set of problems. Social Security faces some long term sustainability issues, though these can be fixed. However, Social Security has a serious side effect: while it doesn’t provide enough money to live on in retirement, the existence of the program means that many people don’t put a high enough priority on their own private retirement savings. That’s especially true for younger workers, but too many people of all ages have been lulled into a false sense of security about their income in old age.

Medicare, on the other hand, does an excellent job of helping older Americans cover their health care costs, but the seemingly inexorable rise in costs threatens to break the federal budget. Unlike Social Security, which can be fixed by some tweaks and adjustments, Medicare is headed over a fiscal cliff. Fixing the program is going to take some heavy lifting. The eligibility age will need to be raised (along with the retirement age in general), some means testing may be needed to concentrate government assistance on the worst off, but Medicare is ultimately hostage to the state of American health care as a whole. We need the kind of reforms that can reduce costs while improving quality, bringing technology and competition to bear.

The third pillar, the 401(k) program, is also flawed. The idea is a good one: to encourage workers to save, with taxes deferred. But there are several problems with the way the concept has been implemented. First, as it is, the system helps more affluent people more than others. Not only do people with higher paychecks benefit more from tax deductions, higher income people are more likely to have spare cash to put away. In many cases, the people who make the most use of 401(k) type plans would be saving that money anyway; the government is losing tax revenue without helping poor and middle income people do much saving. Second, these plans are often poorly run and small, inexperienced investors end up paying too much in fees and making poor investment choices.

Creating a stronger regulatory framework for the administration of these plans will help ensure that worker savings grow and are sheltered from risks without being burdened with high fees. (Stronger does not necessarily mean adding red tape; there are ways of promoting the establishment of very low fee diversified investment vehicles that would qualify for tax deferred investments.) Beyond that, we should look at establishing a program in which the federal government matches contributions by employers and employees up to a certain limit on contributions to these plans, and employees should be automatically enrolled in basic retirement savings plans rather than, as now, having to opt in to be covered.

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  • Amadeus 48

    The Via Meadia team needs to sharpen its thinking on 401(k) plans. The fact that pre-tax wage or salary dollars can be invested–often with at least a partial employer contribution match– and tax deferred is a good thing for everyone who participates, if we are concerned about Americans supplementing Social Security payments in retirement. What difference does it make that more affluent people with higher tax rates are able to participate? There are limits on annual 401(k) contributions, so it isn’t an unlimited tax deferral. Also, employer matches give the employee an immediate investment return on annual contributions.
    One organization I work with contributes 3% of pay to employees’ 401(k) accounts and then matches up to an additional 3% if the employee also contributes, so the employees in effect get an immediate 50% return on their contributions. If an employee leaves, his 401(k) account goes with him.
    In a republic of self-reliant citizens, this is a pretty good program. In a nation of sheep waiting to be fed, watered, and sheared, it would perhaps lack appeal.

  • Anthony

    These are policy issues requiring both informed and organized constituencies. On one level The Feed conflates retirement, employment, investment/speculation, health provision, and program inadequacy; on yet another, the problems enunciated have no solution in sight despite societal importance.

  • Hubbub

    “We need the kind of reforms that can reduce costs while improving quality, bringing technology and competition to bear.” We already have that – it’s called ObamaCare – We do not need ObamaAid or ObamaFund or ObamaSecurity or ObamaDependence or the myriad other programs designed to save us from ourselves at the cost of our souls.

    “Creating a stronger regulatory framework for the administration of these
    plans will help ensure that worker savings grow and are sheltered from
    risks without being burdened with high fees.”

    By all means, lets create another ‘regulatory framework’, for we cannot regulate enough to ‘ensure that worker savings grow and are sheltered from risks with being burdened with high fees.’ Sounds like something straight out of government-speak when it’s ready to slap you up-side the head with more burdensome rules, regulations, and set-asides. Don’t we have enough of this already – your can’t reduce the size of government if you are constantly adding new elements to it.

  • Andrew Allison

    VM needs to sharpen up its thinking about pension plans, period! Medicare is not a pension plan: it’s a single payer health insurance plan for seniors which, like all such, provides for additional private insurance for those who want it. While there are clearly actuarial problems with both Social Security and Medicare, neither is in anything like the mess that Public Employee plans are. Furthermore, 401(k) and other vehicles for the better-off to provide for their retirement are just fine.

    VM has fallen into the entitlement trap. The purpose of Social Security (and MedicAid) is not to keep low-income workers in the manner in which they would like to become accustomed, but to keep them out of poverty. The problem is exactly the same as that raised by the heathcare debate namely what, if any, is the minimum level of support owed to every member of society. In the case of Social Security, that might be a minimum payment regardless of contributions.

  • Corlyss

    Can’t have both an economy 70% dependent on consumer goods and a population with a savings rate that provides for anticipated old age and unanticipated illnesses. It’s like the administration saying they are going to dock Medicare $500 billion and call it savings, and then they are going to take that money and apply it to expanding the pool of insureds.

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