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Last week the Washington Post ran a story on the weaknesses of 401(k) retirement accounts, focusing on the the fact that 1/4 of Americans with 401(k)'s have used them to meet current income needs. Among people in their forties, the share rises to 1/3,  an astounding figure considering how close this group is to retirement. In the wake of the Great Recession and continuing job market problems, it is perhaps not surprising that 28% of 401(k) account holders presently have loans against their accounts.

As the Post delicately puts it,

Many employers have embraced 401(k) and other defined-contribution accounts as a way of helping workers save for retirement while relieving themselves of the financial risks that come with managing a traditional pension plan. In theory, 401(k) accounts are better suited to an economy in which workers are changing jobs more frequently than ever because the accounts can be rolled over from previous employers.
A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby "cut(ting) overall employee compensation," and that 401(k) plans don't take into account the stagnation of real wages, points well made by commenter "Sean2020."

Moreover, as I reported before, 49% of private sector worker have neither a 401(k) or a defined benefit pension plan. Thus, they have no supplement to their eventual Social Security benefits unless they are able to save outside of a 401(k).

And they aren't saving. At least, they're aren't saving nearly enough to maintain their standard of living after retirement. As a report from the Senate's Health, Education, Labor, and Pension (HELP) committee states, there is a  $6.6 trillion gap (methodology here) between what people need to maintain their current standard of living and what they've actually saved for retirement. This is equal to the combined assets of defined benefit pensions and 401(k) type plans, more than total state/local/federal government retirement plans, and more than twice as much as the Social Security Trust Fund. There's a reason I've been using the word "crisis"!

Total Assets

Social Security Trust Fund      $2.7 trillion (12/31/2012)
Defined benefit pensions         $2.3 trillion (9/30/2012)
Defined contribution 401(k)    $4.3 trillion (9/30/2012)
State/local gov't employee      $3.1 trillion (9/30/2012)
Federal employee retirement  $1.5 trillion (9/30/2012)
IRA's                                    $4.9 trillion (6/30/2011)

Sources: Social Security Administration; Federal Reserve, tables L-116, L-117, and L-118 (financial assets only), for DB, DC, and government employee programs; Investment Company Institute for IRAs

This gigantic hole shows that the current model, based on 401(k)'s rather than true pensions, is not working. In a future post I will discuss ways to fix the crisis.

Originally posted to Kenneth Thomas on Fri Jan 25, 2013 at 04:28 PM PST.

Also republished by Social Security Defenders.

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Comment Preferences

  •  I Just Got My 401K Statement (17+ / 0-)

    the other day. I always had good jobs. Often matching funds. I maxed those things out. My parents who are rich, never understood why I invested in them, cause one day when they pass away I will have more money then I can spend in a lifetime.

    But I look at those statements and I couldn't live on those savings for very long.

    Heck I am still trying to make up the money I lost in the last decade.

    When opportunity calls pick up the phone and give it directions to your house.

    by webranding on Fri Jan 25, 2013 at 04:38:37 PM PST

  •  Keep It Simple. (6+ / 0-)
    A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby "cut(ting) overall employee compensation," and that 401(k) plans don't take into account the stagnation of real wages
    While I am hardly one to suggest that employers are white knights, there is an appealing simplicity to "I pay you now and everything's DONE" versus "I pay you now, I guess what I have to pay when you retire, and I am forced regularly to revisit whether I made the correct decision".

    -7.75 -4.67

    "Freedom's just another word for nothing left to lose."

    There are no Christians in foxholes.

    by Odysseus on Fri Jan 25, 2013 at 04:51:47 PM PST

  •  was lucky go get through with defined benefit (16+ / 0-)

    pension - att and then lucent

    it is well funded

    it is not that much, but along with SS, I am in good shape

    also, maxed out 401K and that has done OK

    people who came later - no longer get a defined benefit pension

    and their wages have gone down

    and they are not saving as much

    heading toward a collapse of income for retirees

    *
    Not to mention that my son with his $100K college loan debt and no job may never even be able to pay off what he invested in education

    many young people are screwed

    and the 1% want to reduce SS and Medicare more!!!

  •  look forward to your next post (5+ / 0-)

    now that you've scared us with this one...

    •  Ditto, I also look forward to your future posts. (2+ / 0-)
      Recommended by:
      Kenneth Thomas, whenwego

      Regarding the fact that "And they aren't saving. At least, they're aren't saving nearly enough to maintain their of living after retirement."

      Please consider this AP headline:  'Dismal' Prospects: 1 in 2 Americans Are Now Poor Or Low Income.'  

      I can't imagine that this will be changing anytime soon.

      Either Social Security benefits need to be raised substantially for the lower three quintiles, or the US government is going to need to provide a heavily subsidized defined benefit plan for this same cohort of American citizens.

      Here's the link to the article.

      That is assuming that we as a nation will not be content to see tens of millions of retirees living under bridges over the next several decades.

      Please consider this problem (depressed wages and poverty in the US) in a future diary.  It is mind-boggling that politicians are calling for austerity at a time that the American populace has never been poorer (at least not in my lifetime).

      And thank you for discussing this very important topic!

      Mollie

      “If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

      by musiccitymollie on Sat Jan 26, 2013 at 10:35:24 AM PST

      [ Parent ]

      •  Kenneth, I'm not particularly "keen on" the (0+ / 0-)

        USA Retirement Funds because of a couple of features, but here's a one-minute plus video 'clip' of Senator Harkin discussing his proposed legislature on C-Span's Washington Journal, in case you'd be interested in seeing it.  [Since you referenced it above.]

        Mollie

        “If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

        by musiccitymollie on Sat Jan 26, 2013 at 06:59:00 PM PST

        [ Parent ]

        •  I apologize about this video clip. It worked (0+ / 0-)

          playing it directly from my video clip library at C-Span.

          But, in this diary, I first got no video, but some audio.  Then I got video, but no audio.  Go figure, LOL!

          I'll check out and re-post it IF it works correctly.  Again, my apologies.

          Mollie

          “If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

          by musiccitymollie on Sat Jan 26, 2013 at 07:06:33 PM PST

          [ Parent ]

  •  did pensions work? (4+ / 0-)
    Recommended by:
    Sparhawk, VClib, FG, cynndara

    they came into broad use in the '60s, and promptly started collapsing in the 80s and 90s when the first big wave of retirements hit.  so its not like pensions have some sterling track record.

    •  I'm fairly confident (17+ / 0-)

      that there are plenty of "Executive Pension Schemes" that are working just fine!

      "It's the rich, that gets the pleasures,
      It's the poor, that gets the blame,
      It's the same, the whole world over,
      Ain't it all, a fucking shame"

      I hope that the quality of debate will improve,
      but I fear we will remain Democrats.

      Who is twigg?

      by twigg on Fri Jan 25, 2013 at 05:17:44 PM PST

      [ Parent ]

      •  Re (0+ / 0-)

        There are too few executives to matter. Pension insolvencies happen because there are too many people.

        (-5.50,-6.67): Left Libertarian
        Leadership doesn't mean taking a straw poll and then just throwing up your hands. -Jyrinx

        by Sparhawk on Fri Jan 25, 2013 at 10:02:29 PM PST

        [ Parent ]

        •  Not so sure. (1+ / 0-)
          Recommended by:
          Odysseus

          One million a year is pretty much rock-bottom salary for an executive these days.  But one salary at $1 million is equal to 40 order clerks (doing the actual work) at $25K.  Now figure that most execs make at least 10 million.  Suddenly you have a 400-clerk call center.  So it looks to me like the money spent on one high-rolling executive is pretty much the entire operational cost of a reasonable-sized money-churner.  And all the execs do, is act as pimp and bully-boy for the company.  They Sell, they glad-hand, they Look Good In Public and they beat everyone below them bloody, psychologically speaking.

          It does give you some insight into what our society actually values, in a practical sense.  The abilities to lie and to dominate others are very well-recompensed.

    •  You're right. Corporations cannot be trusted (15+ / 0-)

      to deal with employee retirement plans. And individual earnings have been stagnant because corporations and owners kept all the benefits of productivity increases.

      The government is our last, best hope for a decent retirement for most Americans.

      look for my eSci diary series Thursday evening.

      by FishOutofWater on Fri Jan 25, 2013 at 05:26:17 PM PST

      [ Parent ]

    •  The collapses were due to (11+ / 0-)

      the Reagan administration reduced funding requirements.

      Not because there was anything wrong pensions.

      "What could BPossibly go wrong??" -RLMiller "God is just pretend." - eru

      by nosleep4u on Fri Jan 25, 2013 at 06:42:53 PM PST

      [ Parent ]

      •  And also because (10+ / 0-)

        bankruptcy law changes (also under Reagan) made it easier to raid pension funds.

        "What could BPossibly go wrong??" -RLMiller "God is just pretend." - eru

        by nosleep4u on Fri Jan 25, 2013 at 06:46:23 PM PST

        [ Parent ]

      •  The collapse was due to ERISA (3+ / 0-)
        Recommended by:
        Sunspots, Gemina13, Oh Mary Oh

        After the passage of ERISA in 1974, and the origination of the Pension Benefit Guarantee Corporation, major corporations didn't want the enhanced liability or the insurance payments. That was when the transition to 401K plans started.  

        "let's talk about that"

        by VClib on Fri Jan 25, 2013 at 06:51:47 PM PST

        [ Parent ]

        •  I'd love to hear more about this (2+ / 0-)
          Recommended by:
          Notreadytobenice, Gemina13

          I know ERISA was bad for health insurance, because it made self-insured plans (which many large companies' are, even if they are administered by an insurance company) not liable for damages for medical malpractice. But there's a lot I don't know about ERISA.

        •  Maybe they didn't want it (1+ / 0-)
          Recommended by:
          Odysseus

          but it was 12 years of Republican rule that assured they didn't have to do it anyway.

          For the people, government exists to make sure that they do the right thing whether they want to or not.  Now, are corporations people or aren't they?

          •  cynndara - corporations had choices (0+ / 0-)

            To comply with the new ERISA rules as they applied to defined benefit programs or stop providing pensions and offer defined contribution (401K type) plans or no retirement plans at all. Most corporations over the next decade stopped their pension plans and transitioned to 401K programs. I don't think that members of Congress had any idea that the new law would kill pension plans, but it did. It was a very unintended consequence.

            I am not sure if you are just joking, but in case you aren't the SCOTUS has never declared that corporations are people and has been very clear between the differences of "natural persons" and groups of people like clubs, associations, unions, and corporations.

            "let's talk about that"

            by VClib on Sat Jan 26, 2013 at 12:15:17 PM PST

            [ Parent ]

            •  Ah, yes. (0+ / 0-)

              These things should come with a snark alert (TM).  But as for the corporations shifting over because they didn't like the terms of the law . . . first, the legal paperwork generally ran a hundred and fifty pages of boilerplate; it was my job to print those suckers out night shift at a law firm.  So smaller businesses might have been overwhelmed by the compliance requirements.  Still, the law could have been implemented with more controls.  Companies didn't HAVE to be allowed to weasle out of their commitments.  The government let them.

      •  Actually, just "Googled" ERISA, and as my Father (0+ / 0-)

        would say, "Here's a fine how-do-you-do."

        The ERISA bill was introduced by a Democrat from Pennsylvania, Rep John Dent.  It was signed into law by Gerald Ford.

        I'm rather skeptical of the "unintended consequences" defense, in most instances.  During my twenty plus years with the feds, I never say any policy proposed, much less implemented, unless every detail was scrutinized (and possible outcome).  Partly that was due to the "CYA" culture in the Dept of Defense.

        At any rate, IMO it is the responsibility of lawmakers to know full well the possible outcomes of their legislation (exceptions might be if a "9-11" type event actually affected the outcome, and it would have been impossible to have foreseen such an event).

        That's why they have expert staff, including but not limited to economists.  And if it's arguably not possible to know (within reason) the effect of such policies, "don't go there."

        I suspect that some of the time the PtB use the "unintended consequences" meme when they enact legislation that they KNOW would be wildly unpopular and/or harmful to large swaths of the American populace.

        At any rate, the situation needs to be fixed.  401K's are obviously no rational substitute for defined benefit plans.

        Mollie

        “If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

        by musiccitymollie on Sat Jan 26, 2013 at 01:12:49 PM PST

        [ Parent ]

  •  But wasn't this the end game for those that ..... (9+ / 0-)

    proposed this back in the Reagan days?  It was a slick way to transfer the public's money into the private sector investment class for them to play with.  It was the first act to dismantle the New Deal gains.  There have subsequent actions as follow-up, but I won't get in that here.

    Just ask yourself:  How has your 401K done when compared to DOW 500 average over the course of the years?  Percentages -  Same?  Worse, Better??  The better yields were not the ones they offered you at the company meeting when you had to choose the plan, and amounts and risk factor.

    “The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane.” — Marcus Aurelius

    by LamontCranston on Fri Jan 25, 2013 at 06:30:38 PM PST

    •  Yes. (6+ / 0-)

      Exactly.

      The intent was always to siphon wealth out of the middle class into the hands of Wall Street.

      "What could BPossibly go wrong??" -RLMiller "God is just pretend." - eru

      by nosleep4u on Fri Jan 25, 2013 at 06:47:16 PM PST

      [ Parent ]

    •  Tonight's network news lead with stock market (2+ / 0-)
      Recommended by:
      marykk, Oh Mary Oh

      Tis now Higher than just before the crash in 2007 when he whose name cannot be said was Prez.

      I had/have a myriad of choices ranging CD's to Dow 500 to penny stock type mutual funds in my 401K. Don't think that lack of choices was/is that big a problem nowadays.

      It's a lot of people have borrowed against or cashed-out to (as diary notes) "survive." And a lot of people cashed-out because they said Fudge This, I going to Disneyworld. Been there done that.

      •  Yuppp. (1+ / 0-)
        Recommended by:
        Notreadytobenice

        Didn't do it with my IRA, but might have to tap the IRA if I can't get a job soon.

        Still, people WILL say, at some time in their lives, "What's the point?  Why am I saving, and saving, just so some nursing home can vacuum it all up when I finally go senile and start wetting myself?  What's the point of all this suffering if I don't get to do something I want, while I can still enjoy it? "  Because life for most of us is a long haul of perpetual delay of gratification, and it gets REAL tiresome to think that there's nothing else to it except more of the same, forever until they put you in a hospital bed and start attaching the tubes (and the more money in your account when they do that, the longer they'll keep you sedated and tube-fed so they can keep collecting it).

        •  Yup, happens all the time. Boston nursing homes (0+ / 0-)

          are ~$250K/year and up. Our family lawyer sets up trusts. Does it day- in-day-out. That's what' going on when you see a house sold for $1 in the paper. He sayz put everything in the trust except for ~$100K. That gets you into a "nice" nursing home for about half a year after which you go on medi-caid but stay in the nice nursing home.

          One company I worked for PAID for the trust paperwork.
          Oh joy.

      •  You don't need a lot of choices. (1+ / 0-)
        Recommended by:
        Notreadytobenice
        I had/have a myriad of choices ranging CD's to Dow 500 to penny stock type mutual funds in my 401K. Don't think that lack of choices was/is that big a problem nowadays.
        Basic asset allocation means that you can do pretty well with about 8-10 total options.

        Government bond funds (short term and long term)
        Domestic stock funds (small cap, midcap, large cap, dividend focused)
        Foreign bonds and stocks (probably covering at least two continents each).

        Assuming competent management and low expense ratios, that's a pretty damned good selection.

        -7.75 -4.67

        "Freedom's just another word for nothing left to lose."

        There are no Christians in foxholes.

        by Odysseus on Sat Jan 26, 2013 at 09:27:24 AM PST

        [ Parent ]

  •  I believe 401K's were meant to be the third (5+ / 0-)
    Recommended by:
    maryru, Sunspots, marykk, Odysseus, akeitz

    leg of the retirement stool with pensions and Social security being the other two. They were never meant to stand alone.

    "Gentlemen, you can't fight in here! This is the War Room." - President Merkin Muffley

    by Farkletoo on Fri Jan 25, 2013 at 08:15:11 PM PST

  •  Our 401ks --> COBRA (10+ / 0-)

    All gone, now. We had to continue insurance coverage while unemployed, due to pre-existing conditions. At $1500 to $1800 a month, it added up really, really quickly. Decades of savings are gone. Poof.

    •  You have my sincere sympathy. Mr. Mollie and I (2+ / 0-)

      managed to escape any major setbacks this time, but we have a relative, and several friends and acquaintances who were not so fortunate.  FWIW, you're not by yourself.  

      Why this issue is never the focus of our 'national conversation,' I'll never understand.  It's as though our leaders think if they don't acknowledge this dire circumstance, maybe it'll just go away.  Go figure.

      Mollie

      “If a dog won’t come to you after having looked you in the face, you should go home and examine your conscience.” -- Woodrow Wilson

      by musiccitymollie on Sat Jan 26, 2013 at 01:31:56 PM PST

      [ Parent ]

    •  The President needs to be telling your story (1+ / 0-)
      Recommended by:
      radical simplicity

      which of course highlights why health care should not be tied to being employed.

      I'm really sorry to hear you had to go through this.

  •  401(k)s ARE good however (2+ / 0-)
    Recommended by:
    Odysseus, akeitz

    for avoiding the common problem with regular pension benefits, of companies going bankrupt for the specific purpose of evading their pension obligations.  Since I graduated college in the 1980's with the first wave of these pension defaults, I have been all too aware that a defined benefit pension is only as secure as the company which offers it -- NOT.

    A 401(k) invariably ends up with less in the kitty, but you CAN take it with you.  In fact, given the shennanigans I've seen as a legal secretary working with corporate deadbeats, I've felt most comfortable deliberately leaving employers when I felt insecure about their futures, rolling the 401(k) which they controlled into my own IRA, and thus making damned sure that it stayed in my hands and not theirs.  Think Enron.

    A real defined benefit pension is a lovely thing.  But like all lovely things in a harsh economic world, they are subject to destruction by ravaging capitalist hordes.  Only a state/federal pension can be trusted to survive, and even that could be unilaterally "modified" at the whim of a Republican administration at any time.  

    Furthermore, you CAN'T tap into them early in a crisis, which you can with an IRA.  Perhaps we should see the numbers of people who have done just that as another measure of the extreme burden which the Great Recession has placed on households and individuals.  Most of us are only treading water because we had lots of life-preservers ready just-in-case.  Our much-worshiped Glorious System Of Capitalism ran this Titanic straight onto the rocks, and half the ship has gone down.  You're really arguing here that we should have more comfortable, well-stocked lifeboats (which could easily have been trapped on deck and gone down with the ship) instead of the small, uncomfortable but flexible life-rings and inflatables that are keeping us alive.

    •  as long as you keep in mind (4+ / 0-)

      That instead we could have legally protected pension funds from raiding.  We could have protected them from the bankruptcy court and other scams.  We could have required prudent investment.  We could have worked out a way to make pensions partly portable.

      We did not, in order to facilitate the corporate world's ability to defraud workers of hard earned income.  We did not,  order to provide congress people with a good source of bribes.

      The 401k schemes help you through many of the problems you would not have had if you had a well-established pension.

      The financial industry sucked up the value of the 401k' s repeatedly.  One of my neighbors, now in his 70's has had to defer retirement because of the losses in 2000? & 2007.  The financial industry collected their fees anyway..

      •  Who is WE? (0+ / 0-)

        Since it's obvious that we the people have no control over these parasites and "our" duly elected representatives actually serve the financier class, we have to do for ourselves what we can.  Sure, we could live in a more perfect union, but the chances of that have been deteriorating throughout my lifetime.

        •  good point (0+ / 0-)

          I believed I was reacting to the previous commentator' s boosting of 401k.  I think the 401k was deliberately conceived to undermine defined pensions, to fleece the workers of the country.  There is/was a fair amount of paranoia in my thinking, but that does not make it incorrect.

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