The Goldless Years: How to Save the Nation’s Retirees from Bankruptcy

Source: Teresa Ghilarducci, New Labor Forum, Vol. 18 no. 2, Spring 2009
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From the abstract:
Seventy-five million working Americans, or about half the workforce, currently lack employer-based retirement plans. Tens of millions have recently faced crushing blows to their financial futures, as assets in individual-based, 401(k)-type pension plans fell by over 25 percent from September 2008 to February 2009 alone. Consequently, millions of the elderly are flooding the labor market during the worst employment crisis in 25 years, further exacerbating the unemployment numbers. Much of this unfortunate increase in joblessness is due to congressional policy preferences for commercial, individual retirement accounts (IRAs), like 401(k)s, that replace traditional pension plans. President Obama’s plan will worsen these problems. On February 26, 2009, in his budget submitted to Congress, Obama took a significant step by addressing the pension plan coverage problem, but he didn’t address the serious risks of the plans that he encourages. Thus Obama has moved in the wrong direction. He proposes a system of automatic workplace pensions to operate alongside Social Security that would force employers that don’t offer retirement plans to enroll employees in a “direct-deposit IRA account,” allowing workers themselves to opt out.

Obama’s plan might temporarily increase the IRA or 401(k) participation rate for low- and middle-income workers; but it does very little to solve the fatal flaws of a policy that depends on individuals managing their own private commercial accounts for their retirement. Obama’s plan does nothing to solve the problem of people not having a safe place to save for their retirement, nor does it insure an adequate savings rate, nor does it prevent withdrawals before retirement. People will still pay high retail fees for the financial products; individuals will still take out lump sums and risk not having enough money for the rest of their lives; and, worst of all, individuals will still face investment and market risk: not investing in the appropriate vehicles and possibly retiring when the financial markets are collapsing, like those who will in 2010. The individual account model is fatally flawed and should be replaced with a comprehensive and universal supplement to Social Security.

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