by Linda Stern
Our nation's retirement system is a hot topic. In addition to frequent surveys finding that Americans are ill-prepared and worried about retirement, there are statehouse disputes about whether public pensions are too fat.
There is debate in Washington on how to fix Social Security, and if that is even necessary. And policy wonks, including some in the Treasury Department, are discussing how to tinker with 401(k) plans to make them better.
In the midst of all that talk -- but not, at this point, much action -- it seems worth examining some of the assumptions underlying the debate. It turns out they may not all be true.
Here are a few candidates for "Mythbusters."
Everyone used to have a pension. That is far from the truth. Until pension law changed in 1974, companies used to require decades of vesting for employees; many folks spent 15 or 20 years on the job and were let go just before they vested. So while they technically "had" a pension, they never reaped the rewards. And workers who spend their careers at small businesses or changing jobs every few years were cut out of those fixed-benefit pensions. According to data from the Employee Benefit Research Institute (EBRI), traditional pension benefits may have peaked in 1991, with 37.1 percent of people over the age of 65 receiving income from private or public pensions. In 2009, that figure had fallen only a bit, to 34.5 percent. So, historically, only a minority of retirees have ever received that vaunted monthly pension.
Annuities are the answer. The Obama Administration may soon propose rules that would make it easier for employers to offer workers guaranteed annuities in exchange for their 401(k) balances, according to J. Mark Iwry, deputy assistant secretary for retirement and health policy at the U.S. Department of the Treasury. "We can offer guidance and remove impediments" he said at a retirement policy conference of the National Institute on Retirement Security. That had to be music to the ears of the insurance industry folks who were there: They make a lot of money on annuities, which take a lump sum of money and turn it into guaranteed income for life.
But here's the problem with annuities: Some of them are fee-laden and expensive. And retirees who annuitize too much of their money may be trading away the kind of flexibility they need in case of emergencies. Having a monthly income guaranteed for life might be nice, but it doesn't really reflect the irregular way in which people typically spend money in retirement. The solution? Consider annuitizing only 15 percent to 20 percent of your nest egg, suggests EBRI's Dallas Salisbury. And when you do, find a reasonably priced annuity.
We need a new program. Some thinkers suggest that we need a new savings program -- something between 401(k) accounts and guaranteed pensions. Something that requires automatic investments and guaranteed income for life. Ahem ... isn't that what Social Security is? We already have Social Security, 401(k), 403(b), public pensions, private pensions, deductible Individual Retirement Accounts, nondeductible IRAs, Roth IRAs, Roth 401(k)s, and SIMPLE, SEP and Keogh accounts for the self-employed, and I've probably forgotten a few. The one piece that's missing for most workers is professional money management in their 401(k) accounts. Employers and policymakers could fix that by allowing workers to buy into existing programs with their retirement funds.
You're doomed. Make no mistake: You will never regret saving too much for retirement. The more you have, the more life style options you have. But what typically happens in retirement is not that a person runs out of money and gets kicked to the curb. A more likely scenario is that they spend less, eat at home more, skip the trips and tighten their belts as they go. They can still enjoy family and friends and everyday life even if they don't have the same disposable income as before.
Social Security -- which isn't going away soon -- has saved many people from the alarming pet-food scenarios that were more prevalent a generation ago. People who completely run out of money and can't support themselves are typically older and in need of expensive care that regular retirement savings and annuity payments aren't typically sufficient to cover for too long. There are answers for that, too, but they'll have to wait for a future column.