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TheFailureofthe401(k):ReinventingRetirementSavingsPlansForaMoreSecureFutureNovember10
th
,2010,Washington,DCSPEAKERS’REMARKS
R
OBERT
H
ILTONSMITH
P
OLICY
 A
NALYSTAT
D
EMOS
AsTeresajustkindlynoted,IamRobbieHiltonsmithandI’mapolicyanalystwiththeEconomicOpportunityProgramatDemos.Justabitofbackgroundonus:Demosisanationalpolicyandadvocacyorganizationworkinginpursuitof4overarchinggoals:
o
 
Amoreequitableeconomy;
o
 
Avibrantandinclusivedemocracy;
o
 
Anempoweredpublicsectorand,
o
 
ResponsibleU.S.engagementintheworldIamheretospeaktodayaboutthestateofoneofthepillarsofournation’sretirementsystem-individualretirementplans.OurcountrywasbuiltonthehardworkofAmericans.BeginningwiththecreationofSocialSecurityin1935,wehave,asanation,honoredthatworkwithacommitmentadignified,secureretirement.Moreover,oldagesecurityisavalueweallshare:webelievethatsucharetirementshouldbetherightofallworkingAmericansAsyouwillheartoday,andasthepaperDemosisreleasingtodayshows,wenotalwaysliveduptothiscommitment.Ifwestaythecourse,we’llretirewithlessthanourparentsandourchildrenwillretirewithrelativelylessthanwedid,reversingmanyofthegainsofthepastfiftyyears.
 
 
Thisdecline,however,isnotirreversible.AsKarenandMoniquewillhighlight,withcommonsensepolicieswecantrulyfulfillourcommitmenttoasecureanddignifiedretirementforallAmericanworkers.Inshort,theAmericanretirementsystemisintrouble.Currently,halfofretireesrelyonSocialSecurityforover80%oftheirretirementincome.WiththemedianSocialSecuritybenefitat$14,000ayear,manyretireesareforcedtoliveonincomesthatarewellbelowthefederalpovertyline.Forthe52%oftheworkforcethathassupplementalretirementincome,thatsupplementisincreasinglyanindividualretirementplan—a401kor403b.Theseplans--personalaccountsintowhichworkersmaketax-advantagedcontributionsthataresometimes,butnotalways,matchedbytheiremployer--havereplacedthetraditionalpensionastheprimarysupplementtoSocialSecurity.Thetraditionalpension,whichmanyinpreviousgenerationsreliedon,guaranteedfixed,lifetimepaymentsduringretirement.Individualretirementplansdiffergreatly—savingsaresubjecttothefluctuationsofthefinancialmarketsandnofixed,lifetimepaymentsareguaranteed.It’simportanttonotethatindividualretirementplanswereneverintendedtobecomethemainsupplementtoSocialSecurity.CreatedbytheRevenueActof1978primarilyasavehiclefortaxingexecutivebonuses,theseplansbecametheprimaryvehicleforprivateretirementsavingsthroughregulatoryfavoritismandadoptionbycompanieslookingforalessexpensivemeansofprovidingretirementbenefits.Imentionthistohighlightthatourcurrentretirementsystemwasn’tcreatedbythekindofcomprehensive,thoughtfulandinclusivenationalconversationthatoneofthemostimportantsocialissuesfacingourcountrydeserves.IthinkmostAmericanswouldagreethatbackdoorlegislatingthroughthetaxcodeisnowaytotreatanissueofsuchimportance.Individualretirementplansdocontainsomefeaturesthatarethataremoresuitedtotoday’smobileworkforcethanthetraditionalpension—primarilyportabilityandpersonalownership
 
 
ofassets.However,individualplans’drawbacksfaroutweightheiradvantages.Tostart,toofewworkershaveaccesstoworkplaceretirementplansandthataccessisnotsharedbroadly;just53%ofprivateindustryworkershaveaccesstoemployer-providedretirementbenefitsofanysort.Therearegreatdisparitiesintheavailabilityofindividualretirementbenefitsbynearlyeveryconceivablecategory:industry,race,income,employersize,andjobstatus.Forexample,only45%ofworkersintheserviceindustry,oneofthenation’sfastestgrowingsectors,haveaccesstoretirementbenefitsatwork,while80%ofmanagementandprofessionalworkersdo.Evenforthose“fortunate”enoughtohaveaccess,individualretirementaccountsareclearlyfallingshortofprovidingadequateretirementbenefits.ForthehalfofAmericanfamiliesthathaveretirementsavings,themedianbalanceforthoseapproachingretirement(55-64)isjust$98,000,lessthanhalfofwhattheyneedforretirement.Sowhyaretheyfallingshort?Manyofthelargetrendsintheeconomy—fallingwages,depletedhomeequity—havemadeitmoredifficultforfamiliestosave.Buttheaccountstheyaresavinginhaveamajorroleaswell.Betweentheoutrageouslyhighfeesandthemultitudeofriskstowhichaccount-holdersareexposed,individualretirementplansaresimplyunsuitabletobeournations’primarysourceforpersonalretirementsavings.First,we’llenumeratetherisks.Account-holdersruntheriskofoutlivingtheirretirementsavings,retiringinthemidstofamarketdownturn,havingtowithdrawtheirretirementsavingstopayforalargelifeexpense,suchasabigmedicalbill,orsimplynotknowinghowmuchtocontribute,orwheretoinvestit.Inthistalk,I’mgoingtohighlight“marketrisk”,theriskoflosingalargepartofones’savingstothevolatilityofthemarket,becausethisreallyistheriskthatrendersindividualaccountsirreparablyunsuitableasprimaryretirementsavingsvehicles.
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