FIXING RETIREMENT: PART 2
“When tens of millions of people all have the same problem, it’s not a failure of individual initiative.” Ganesh Sitaraman and Anne L. Alstott, law professors and authors
In our last issue, we looked at why many people are not going to have enough money to retire. Wisconsin treasurer Sarah Godlewski is establishing a task force to study and make recommendations on retirement. This effort will likely not address all possible solutions in order to make its recommendations more politically palatable to the Republican-controlled legislature. But the people of Wisconsin need a full examination of all possible solutions.
Some states are making efforts to address the retirement crisis. Their proposals focus on improving defined contribution programs (IRAs and 401ks). Defined contribution retirement plans are voluntary and individual. They can be sponsored by employers, banks, or other financial services organizations. They provide tax advantages to encourage people to participate. These can be useful.
But they are not traditional pensions with guaranteed retirement income. All the responsibility and risk rests with the individual. The employer may or may not provide a matching contribution but they have no responsibility for the final income.
Traditional pensions are defined benefit programs. Employers and employees contribute to the program. All contributions and investment returns are pooled in a trust fund. The program is usually run by a retirement or investment management organization.
Retirement benefits are based on the amount contributed to each individual’s account, years of service, highest pay, and other program criteria. Thus, is it called defined benefit. The employer is responsible for making contributions on behalf of the employee AND for managing the retirement program to ensure sufficient funds to pay promised benefits. The pensions are backed by the federal Pension Benefit Guaranty Corporation.
Professors Ganesh Sitaraman and Anne L. Alstott in their book “The Public Option: How to Expand Freedom, Increase Opportunity and Promote Equality”, propose a “public option” 401k as a solution to the retirement crisis. Every worker would automatically be enrolled. About 3 to 5 per cent of their wages would be deposited in a retirement savings account managed by the federal government.
Individuals choose investment options from an approved list. At retirement, their balance would be converted to an annuity providing a guaranteed income for life. This is a big improvement over the current 401ks.
This could help some people save more for retirement. But this is not a retirement pension program nor does it addresses the problems of existing individual defined contribution retirement programs.
Individuals still must have enough income to contribute! Too little income still results in too little retirement savings. All risks are still borne by the individual. If the markets tank, so does your “savings.” For more information on this, google CNBC A brief history of the 401k, which changed how Americans retire.”
As the opening quote says, accusing people of lacking individual responsibility will not fix our retirement problems. The Wisconsin task force needs to look at serious retirement reforms.
In part 3 of this series we will look at several defined benefit options that could actually fix our crisis.