Pensions, 401(k)s and what's next
Host Tess Vigeland asks economist Teresa Ghilarducci how today's plans compare with retirement strategies from the past and some proposed plans for the future.
Teresa Ghilarducci, professor of economic policy analysis at The New School. (University of Notre Dame)
More on Investing, Retirement - Saving
TEXT OF INTERVIEW
Tess Vigeland: We're going to continue our discussion now of the 401(k) system.
Teresa Ghilarducci is an economist with the New School in New York, and Teresa, with pensions, the so-called defined-benefit system, your company sets aside money and you know what you're getting in return. With 401(k)s, you put the money in voluntarily and then you cross your fingers that you'll have something in the end -- your return depends on the markets.
Teresa Ghilarducci: There's actually another thing it depends upon: You don't actually get to survey the whole market and decide where to invest. You only can invest in the places that your employer has chosen for you. We're also finding that there's often a conflict of interest between the firm's loyalty to you and the firm's loyalty to the financial firms that they choose. The other problem is that most people withdraw money from their 401(k) plan before retirement, and worse, many employees think that employers are required to contribute to 401(k) plans, but in fact it's only voluntary from the employers point of view.
Vigeland: Given that we've seen a massive shift from the pension system to the 401(k) system, do either of them provide enough retirement income, with of course the add on of Social Security?
Ghilarducci: That's a good question. If you have a defined benefit plan and you work for a company at about age 40 and you keep it until you retire, the defined benefit plan, the tradition pension plan and Social Security will give you enough. The 401(k) plan is now a little under $100,000 on average for someone approaching retirement. That, for an average earner, will not give you enough with Social Security to replace your income. And so I've declared, for most people, the 401(k) system is a failed experiment.
Vigeland: You called 401(k)s a "failed experiment" -- is that fair given that they've really only been popular since the '90s?
Ghilarducci: Yes. It is fair because the projections of what they could do are really based on our observations of human behavior. Most experts are convinced that people will withdraw the money from their 401(k)s before they retire, and if they do that and only save at the extent that they are saving -- you know, 5, 10 percent -- they'll never be able to supplement Social Security to provide an adequate retirement savings.
Vigeland: Well, you've proposed a new retirement system that you argue combines the best parts of a pension and the best parts of a 401(k). Describe for us how it would work.
Ghilarducci: What I've proposed is an expansion of the Social Security system with a twist. I propose that at minimum people contribute five percent, with perhaps some help from their employer. That money would be invested by the government in stocks and bonds and other assets, and in return for their contributions, the federal government would guarantee three percent adjusted for inflation, so today it would be about seven percent guaranteed return. And everybody I've talked to said they would jump at that chance to earn seven percent return on their 401(k) plan, given what they've just gone through, which is a negative 22 percent, at best, return on their income.
Vigeland: Teresa Ghilarducci is professor of economic policy analysis at the New School for Social Research in New York and her book, "When I'm 64: The Plot Against Pensions and the Plan to Save Them" came out this year. Thanks so much for your help today.
Ghilarducci: Thanks Tess. It was an honor to be with you.
Comments
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From afton, VA, 11/27/2008
READ!!!
Analysts point to another disturbing part of the plan. With a GRA, workers could bequeath only half of their account balances to their heirs, unlike full balances from existing 401(k) and IRA accounts. For workers who die after retiring, they could bequeath just their own contributions plus the interest but minus any benefits received and minus the employer contributions.
From afton, VA, 11/27/2008
READ:
Analysts point to another disturbing part of the plan. With a GRA, workers could bequeath only half of their account balances to their heirs, unlike full balances from existing 401(k) and IRA accounts. For workers who die after retiring, they could bequeath just their own contributions plus the interest but minus any benefits received and minus the employer contributions.
11/27/2008
If we could commonly buy TIPs in our 401k plans, we could be guaranteed 3% real (after-inflation) return right now. The problems with 401ks are the limited choices and high fees. If everyone had the right to invest in the funds of their choice, the 401k would be an excellent savings vehicle. Better yet, give all Americans access to the Thrift Savings Plan, currently only available to the military and federal employees.
From afton, VA, 11/27/2008
50% of my hard earned money that I could leave my kids through inheritance in my current 401k now is replaced and instead 50% of my money is GIVEN it to my country. I love my country but MY kids come first. If you want to give 50% of your money to our great country do so. BUT PLEASE DON'T advocate that I or anyone else should bequeath a mandatory 50% to anyone but our children.
http://www.carolinajournal.com/exclusives/dems-target-private-retirement-accounts.html
This, without a doubt is the stupidest suggestion I have ever heard.
First of all, inflation is cooked. Shadowstats doesn't use Hedonics, weighting or substitution like the BLS. Using cooked inflation only hurts the recipient. 8% interest when we are loosing 16% a year is a 50% loss. That is criminal.
The Social Security "Trust" "Fund" is EMPTY. Social Security is insolvent. You want to put your money and mine in the hands of those who have run this system into the ground? Everyone in Congress knows this is a huge problem, but doing something is political suicide so it is passed on to the next official.
Why don't you teach your students to just burn money instead? Please Marketplace, if you are going to do an interview wake up and get the facts. You are promoting some very dangerous plans. 50%??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????
From MA, 11/23/2008
Government pension funds are further out of your control than even 401K.
1. Will Government be able to fund existing Social Security obligations? With increasing government debt, aging population (i.e reducing funds coming into SS).... So where will the government get this money from?
2. Look at Germany, where the government spent most of the pension money to rebuild East Germany. Now the money is gone, with minimal to no returns. What prevents a similar situation in the US?
In the end, do I expect any money from Social Security? - No.
From tokyo, 11/22/2008
If I may add a comments, it seems that the proposal by Professor Ghilarducci is for the Government (ultimately the taxpayers of the United States) to be provider of a minimum pension, with a contribution from each working person.
ONE: the proposal sounds replacement of private with a public pension plan with limited funding by the worker -- a mix of defined benefit and defined contribution methods.
TWO: it is hard to determine if the Government can do a better job of creating a positive return or enough of a return to ensure that the retirees' contribution over their working life is enough to provide a liveable pension (amount still to be determined) for their second life in retirement (which continues to lengthen). The Government will like gain a lower execution and settlement cost than individuals. But the surrounding bureaucratic and administrative needs will likely add costs.
THREE: if this is acceptable to the majority of the workers in United States and will add stability and confidence, then it may be of value. But, a socialist based solution seems to be counter to the basic philosophy of the market, economcy and society in the United States.
I would like confirmation, from Professor Ghilarducci, of comments.
Sincerely -- Ron
From NY, 11/22/2008
Jeff, you appear to have responded without thinking nor reading the interview. You are already giving the government/Social Security more than 7% of your income every year, along with your employer adding another 7+%. Would you like to give the government less, say, a minimum of 5% (read the interview). Also, would you like the government to guarantee a 7% annual return (3% plus inflation) on your Social Security account, regardless of how the Dow, S&P 500, NASDAQ, or any of the other indeces perform? Do you realize that the government is giving you zero percent on your Social Security account during your working days and only about a 4% annual increase in retirement (2008 increase)? If I can add one more feature to Theresa's proposal, allow retirees access to their account balances during retirement, instead of only receiving payments in the form of an annuity.
11/22/2008
Force me to contribute another 5% of MY money to the government and let them invest it! What does this gal think 401(k) plans are invested in right now...stocks and bonds.The government has done a great job with soc sec...joking. Keep the government away from our money.
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