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Retirement Challenges Are Worse Than People Thought

Walter Russell Mead

Two out of every three Americans don’t put away any money in their 401(k) accounts, according to the U.S. Census bureau. Bloomberg has the story:

Census researchers Michael Gideon and Joshua Mitchell analyzed W-2 tax records from 2012 to identify 6.2 million unique employers and 155 million individual workers, who held 219 million distinct jobs. This data produced estimates starkly different from previous surveys.

For example, previous estimates suggested more than 40 percent of private-sector employers sponsored a retirement plan. Tax records uncovered a much bigger pool of small businesses, showing that, overall, just 14 percent of all employers offer a 401(k) or other defined contribution plan to their workers.

Bigger companies are the likeliest to offer 401(k) plans, and since they employ more people than small firms, skew the overall number of U.S. workers who have the option. Gideon and Mitchell estimate 79 percent of Americans work at places that sponsor a 401(k)-style plan. The good news is that’s more than 20 points higher than previous estimates. The bad news is that just 41 percent of workers at those employers are making contributions to such a plan—more than 20 points lower than previous estimates.

The combined result of those two numbers is that just 32 percent of American workers are saving anything in a workplace retirement account. Four out of five workers are employed by companies that offer a 401(k) or similar plan, but most workers aren’t using them—either because they’re not eligible or because they aren’t signing up.

Saving for retirement is one of the basic tasks that any individual (or family) faces, and while society isn’t responsible for the poor choices that individuals make, it has a clear interest in ensuring that the overwhelming majority of people are adequately prepared for the years when they cannot work.

As it is, only a minority of Americans are making adequate preparations for retirement and the political establishment is giving its best impression of a deer in the headlights.

In the world of the gig economy and job hopping, the traditional 401(k) is a bad fit for more and more workers. At the same time, the tendency of many well-intentioned politicians to wrap retirement programs in layers of intrusive and expensive regulations, intended as they may be to protect workers, has the effect of making good programs too expensive for many businesses, especially small businesses, to operate.

Ultimately the best approach is likely to involve shifting the retirement system away from the current employer-based system toward one based on individual accounts. Government can and should provide a regulatory framework for these accounts, but they ought to be managed by financial firms. This might include some kind of portfolio insurance to guarantee a basic income. There can and should be incentives for people to contribute to these accounts—tax advantages and deferrals, as well as matches for low-income workers and for parents of young children temporarily out of the work force. Employers can also be encouraged to match contributions.

This is a good deal for small business especially, allowing companies to offer a retirement benefit with minimal paperwork and no responsibility for managing or operating the funds.

While government can and must lay out the basic legal and regulatory framework for these accounts, it should stay out of the business of micro-managing investment decisions, guaranteeing returns, and imposing cumbersome regulatory burdens that make the system less flexible and more expensive.

Realistically, there are going to be other changes. The retirement age is going to continue to increase and more and more people are going to be healthy enough to work longer. Jobs are becoming less physically demanding, more people are remaining healthy until later in life, and self-driving cars and telework are going to make it easier for older people to stay in the workforce longer.

This is all good; the more people who work later in life the more productive and prosperous the country will be, and the better we will be able to afford help for those who are physically disabled and otherwise unable to work.

But the failure of the political class to recognize the impending retirement disaster staring millions of Americans in the face is an example of the elite incompetence that brought Trump to power. Our elites don’t feel a sense of urgency about entirely predictable problems that threaten to devastate the middle class. Transgender bathrooms we do immediately; affordable and secure retirement for the middle class: yawn.

We need a retirement system that works for the middle class. More than that, or more urgently than that, we need a political elite that understand how good leaders think.

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