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.
Pension MeltdownAmerica's Pension System is Failing Those Who Need it Most
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