It was mentioned in the Democratic Platform in 2008; yet, no efforts have made to make it a reality for all working Americans. Even though pension security is not a “hot” political issue as of late, I believe that it will become a major issue within the coming years, as the population will slowly start to age and as a larger number of Americans begin to realize that the current system of employer sponsored 401(k)s have been a free-market disaster.
Here are some startling facts about the state of 401(k)s in the United States:
• A 2008 study performed by Deloitte Consulting (before the market crash) found that only 13% of employers thought that 401(k)s would provide a secure retirement for their workers.
• According to SmartMoney magazine (November, 2009 issue) nearly 90% of the country’s 401(k) plans are watched over by people who do not need any special qualifications or investing experience.
• From the end of 2007 to the end of March, 2009 the average 401(k) balance fell 31% according to Fidelity Investments.
• As of the year 2011, the average 401(k) balance of an American worker was $71,500, much lower than is needed to live comfortably in retirement.
• Nearly half of income put into a 401(k) can be eat up through extremely high (and more than likely undisclosed fees) over a 30 year time span, according to 60 Minutes (“The 401(k) Fallout,” April 19, 2009).
It is obvious that something needs to be done about retirement and pension security in America. The deregulated, unprofessional mess of the current 401(k) system needs to be replaced with something much more secure, much more transparent, and something that is protected from market failures. There are two main ways that we can overhaul the current system and promote retirement security.
Number One: We need a government-backed retirement plan that is non-invested and guarantees a steady stream of benefits, post-retirement. To ensure that the plan is financially stable, the government should mandate that at least half of the benefits provided by this program be pre-funded or saved up by the worker and that another 25% of the benefits be funded by the business that the employee retired from. Finally, the government would fund the last 25% through regular tax revenue. In the case of small businesses, the government could heavily subsidize the amount of benefits that need to be paid out. This would provide a stable stream of income for all workers in retirement and would not be exposed to the sketchy investing practices on Wall Street.
Number Two: Any employer-sponsored retirement plan that is privately invested needs to be tightly regulated by the government. I believe that we should create a new government agency to oversee invested pensions and retirement accounts. This new agency would maintain oversight on the security of all invested pension plans, whether defined benefit or defined contribution. Certain guidelines would be set for invested plans such as a limit on excessive fees, a rating system on different types of investments, and the banning of any “risky” investment strategies.
I believe that if these two proposals became law, that America would be on a much more sustainable track in terms of retirement security and investing. If we care about the future retirement security of all Americans, young and old, I believe that we need to demand that Congress (especially the Democrats in Congress) and President Obama take a tougher stand on this issue and fulfill the promise in the ’08 Democratic Platform regarding retirement security. It might not be the most “popular” issue, but it is still a very important one.