Golden years losing luster? Why 401(k)s are part of the problem – and Social Security is still the solution

February 23, 2011 | Alex Stone

It’s not exactly breaking news that the stock market crash, housing bubble, and resulting recession helped delay retirement and drive down living standards for millions of baby boomers. In their article titled Boomers Find 401(k) Plans Fall Short, the Journal reported that the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed to maintain their standard of living in retirement.

To demonstrate the problem, the Journal created this handy chart (click to enlarge), which assumes a median annual household retirement income of $74,545.

Note that households with both pensions and 401(k)s are in better shape than most, with an estimated gap of about 5%. However, with only 15% of private sector workers in a pension plan, these retirees are the minority.

As corporations have cut benefits and shifted costs to employees, pensions have become a thing of the past – resulting in annual retirement income shortfalls of up to 50% for some baby boomers. The shift from pensions to 401(k) plans – a corporate cost-saver idea that took off in the 1980s – has actually contributed to the current retirement crisis for millions of baby boomers:

Initially envisioned as a way for management-level people to put aside extra retirement money, the 401(k) was embraced by big companies in the 1980s as a replacement for costly pension funds. Suddenly, they were able to transfer the burden of funding employees’ retirement to the employees themselves. Employees had control over their savings, and were able carry them to new jobs.

They were a gold mine for money-management firms. In 30 years, the 401(k) went from a small program to a multi-trillion-dollar industry supporting thousands of financial planners and money managers.

While the Wall Street Journal article focuses on the failings of 401(k) retirement accounts, take a look at the dark blue portion of the above chart. Social Security is still the foundation of a dignified and secure retirement for the average American family.

According to the Congressional Research Service, 75% of those over 65 have incomes below $34,000 – including Social Security payments. Social Security is no longer just a leg in the proverbial stool of retirement – for many, it is their only retirement plan:

Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don’t come close to making up that gap.

The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity.

That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed.

Protecting Social Security and ensuring all workers have access to safe, secure and portable retirement options is more important now than ever.

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Posted in Retirement Security, Social Security

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