Political news constantly highlights Social Security as not being funded enough (not true, but that’s the line). Pensions — especially government pensions — are not funded enough (true). And 401(k)’s took a hit in the Great Recession, giving many people 40% haircuts to their potential retirement nest eggs in a very short period.
But Ezra Klein makes a very important point about these three financial tools:
Too often, these are three separate conversations, and they’re frequently lashed to other issues. Social Security is usually discussed in terms of the deficit, and Washington brims with plans for cutting Social Security benefits. The conversation over state pensions usually is really about the sustainability of state budgets. And when we talk 401(k)s, we tend to be talking about volatility in the stock market.
But really, these are all the same conversation, about the same problem: retirement security. The late 20th century saw a great shift in risk, in which uncertainty that had been borne by employers and the government was shunted onto individuals.
There are two key components here. The first is that the issue is retirement security, not some part of one’s overall retirement like Social Security or a pension. The second is that the uncertainty “borne by employers and the government was shunted onto individuals.” Let’s take a look at both.
First, I really like this model for what it takes to retire. When we sit down and think about retirement, we think of our 401(k) or IRA’s done when we leave a company and go to another. Most of us do not have a pension options anymore — Ezra notes that “By 1995, there were more 401(k)s plans than traditional pension plans. Now there are about twice as many.” You can see the trend — your retirement income is up to your ability to save in a 401(k) and invest the money well.
The real issue is what kind of financial security will you have that will enable you to retire comfortably?
To be fair, for most people, this is hard to do. You have to project your Social Security payment, ask for help to get a pension calculation, decide how much you should withdraw from an IRA and then take that and project how many years it will last, and finally look at your savings. Even if you find a cool retirement calculator on the Internet (where you can get totally depressed going through the exercise…), it takes a lot of thinking and research on your part to get to a number to put into a retirement calculator. Much less what to do with the number once you get it.
Yet, doing this process and taking action on the results is critical for taking the right actions to give yourself a shot at retirement security — while still enjoying life while you are doing it.
Uncertainty is now borne by people
This, I think, is missed by most people. There has been a concerted effort to shift responsibility — and risk — to you and your family for figuring out how to get to retirement security. Pensions were simple. You worked at the company and the longer you worked at the company, the bigger the pension. All the risk was on the company to meet the pension requirements.
Now? Pensions are gone — there are 401(k)’s out there and the risk in the portfolio comes from your ability to manage an investment portfolio in the stock market. The risk to the company? Zero; the risk is all on you and your ability to manage money. Where, by the way, we have received a paltry amount of training and need to rely on other people, like financial analysts, to tell us where to invest.
My perception is that most people do not understand that their retirement funding is really all about their ability to manage money in a retirement tool like an IRA and from their savings. I know too many people who retired with their 401(k)’s moved into their IRA’s — and then lost much of it in the latest recession because they didn’t know how to protect themselves in a downturn. Now they are selling houses to cut expenses, trying to find work when their skills are not up to date, and trying to figure out how to make it living in retirement.
I don’t have the answers, but it is a problem. How have you tried to build retirement security?