The New Demographics of Planning

Managing Income Adequacy: Back to the Future?

With a retirement security crisis at hand, look to pensions for a solution

by Bailey Childers

Ms. Childers is the Executive Director of the National Public Pension Coalition, where she leads national and state efforts to protect the retirement security of public employees and advance retirement security for working Americans. Visit

In the 1970s, corporations looking for a new tax-advantaged benefit for their highly-paid executives pushed for the creation of the 401(k). This new tool allowed members of the c-suite to put aside money for retirement pre-tax.

Never intended to be used as the primary vehicle for retirement security, however, laws passed in the 1980s spurred corporate America to abandon traditional defined benefit pensions for most of their workforce and replace them with 401(k)s.

Unfortunately for most Americans, this move has undermined their ability to achieve a secure retirement. With a looming retirement security crisis in the United States, it’s time we take a hard look at how we save for retirement and adjust our thinking about how to ensure more people can achieve the final leg of the American dream: retiring with dignity.
Statistics you will read about retirement security are troubling, but in sum, they tell us that most people are nowhere close to having what they need to retire.

Restricted Access

For starters, roughly half of working Americans do not have access to a retirement plan at work. Those who do have access to a retirement plan still lack the necessary savings for retirement: the median total balance in 401(k) accounts is $18,000.

This problem impacts women, who are 80% more likely than men to be living in poverty at age 65 and above. This problem impacts African Americans, where three out of four households have less than $10,000 saved for retirement. This problem impacts Latinos, only 38% of whom work for an employer that offers a retirement plan. And this problem impacts millennials, more than two-thirds of whom do not have a retirement plan.

Ted Benna, the “father of the 401(k),” says in retrospect his creation “helped open the door for Wall Street to make even more money than they were already making.” Never intending for the 401(k) to be the primary retirement savings vehicle for most Americans, he says, “Well, it’s not good, but it’s reality.”

There are several ways the 401(k) fails the average investor.

First, most people lack adequate understanding of financial markets to make solid investment decisions. An individual who lacks training in investments is more likely to leave money in the market too long on a downturn and be too slow to get back in when the market turns up.

Second, 401(k)s leave individual investors at the mercy of market forces. Think back to those tumultuous years in 2007 and 2008. Did you know someone who was ready to retire, but when the market crashed could no longer do so because of the losses in their 401(k)? Most of us did; the average 401(k) losses among plans tracked by Fidelity Investments were 27 percent. In addition, a variety of factors like low (if any) employer matches, lack of automatic enrollment, the ability to borrow against a 401(k) for a home or other expenses, and other factors make it almost impossible for most families to save what they need for retirement in a 401(k).

Today, some financial advisors argue saving 15 percent a year is needed to achieve 70-80 percent income replacement in retirement. While that may be ideal, it’s a rate that is unrealistic for most working Americans.

How to forge a secure retirement?

With gridlock in Washington, it’s largely fallen to the states to make policy changes that will help families retire securely. Rather than expanding access to pensions and a truly secure retirement, many states have seen ideological attacks on public sector workers and their pensions.

Often taking lower wages in exchange for deferred compensation in retirement, 84% of state and local public employees like teachers, firefighters, nurses, and police officers are still offered a pension at work. Although opponents of public pensions have spent millions on the attack, most states have rejected these moves. In this year’s legislative session, South Carolina lawmakers rejected a misguided push to close its pension plan in favor of a 401(k). Maryland lawmakers rejected a proposal from Governor Larry Hogan to offer an optional 401(k) to state employees, an unnecessary measure that would have undermined the funding stability of the pension system.

For starters, roughly half of working Americans do not have access to a retirement plan at work. Those who do have access to a retirement plan still lack the necessary savings for retirement: the median total balance in 401(k) accounts is $18,000.

States are sticking with pensions because pensions provide the most stable form of retirement security. Pensions are pooled, professionally managed accounts that share risk between employees and employers. No individual employee’s retirement security is left to the whims of the stock market, as with a 401(k).

Pensions prevent the kind of life-altering change that hit 401(k) holders during the recession because pension systems are able to invest on an infinite time horizon. Over ten, twenty, or thirty years, as older workers retire and new workers join the plan, the pension fund can recover major losses. We’re seeing that now as aggregate pension funding across the country continues to move toward 80%.

States’ Actions

Even with all we know about the benefits of pensions compared to 401(k)s, some states are still debating changes that would be detrimental to the state and its workforce. In Michigan, for example, Republicans in the State House and State Senate are working behind closed doors to end pensions for teachers and school employees. They tried in lame duck session in 2016 and were unsuccessful due to an outcry from workers.

Lawmakers in Michigan should know better, as the closure of the State Employees Retirement System in 1997 has resulted in higher costs to the state and abysmal retirement security for workers. The Office of Retirement Services in Michigan found that after 20 years of offering only a 401(k) to state employees, the median 401(k) savings were $37,260 with the average savings only slightly higher at $79,878. Neither figure will get a family very far in retirement.

In Kentucky, Governor Matt Bevin has called for a special session to address tax reform and pensions. During his electoral campaign in 2015, he campaigned on closing the state’s pension systems and putting teachers, firefighters, and police officers into a 401(k). Kentucky would be wise to learn from its neighbor West Virginia who experimented with 401(k)s for teachers starting in 1991. By 2005, West Virginia had re-opened its pension plan, realizing they could
offer a better benefit to teachers at half the cost by using a pension instead of a 401(k). 76 percent of teachers opted to go back to the pension, seeking the superior retirement benefit it provides.

Other states are tackling the question of how to get more workers covered with a pension. In 2016, Wisconsin passed a bill to allow municipalities that did not offer a pension to join the Wisconsin Retirement System (WRS). The WRS is a fully-funded, model pension system that serves over 600,000 correctional officers, teachers, firefighters and others. This bill allowed the mayor of Sun Prairie, Wisconsin, to offer city firefighters a pension.

The City of Palm Beach, Florida also recently abandoned its experiment with a hybrid and returned its public safety officers to a pension. Palm Beach also enhanced the pension benefit of its general employees’ hybrid plan, citing recruitment and retention problems in both cases.

In Alaska, a state that closed its pension plan in 2005, debate continues about re-opening the pension plan to teachers, firefighters, and other public employees. A recent study by the University of Anchorage found that Alaska has been spending a staggering $20 million annually to recruit and retain new teachers. Lack of a secure retirement is likely a driving force behind this problem.

The question all policymakers should be asking is how do we get more people covered by a retirement plan that will provide a secure retirement? Pensions are the gold standard and states should continue to look for ways to cover more workers with a pension. Where that is not possible, lawmakers should look for plans that offer the design elements that make pensions such a good tool: pooled accounts, professional management, and shared risk, among others.

At least for now, the burden of this problem will rest on the states. Congress recently undid Obama-era regulations to make it easier for states to create plans for workers in the private sector who aren’t offered a retirement plan at work. At this point it’s unclear, but unlikely, that Congress will work to enhance Social Security benefits, another key way elected officials could address the retirement security crisis.

Voters expressed a lot of frustration at the status quo in the 2016 elections, and retirement security is at the heart of the middle class’s ability to achieve the American Dream. ◊