The Great Risk Shift
Klein, Ezra, Newsweek
Byline: Ezra Klein
Your retirement is now your problem.
You've heard of the Social Security crisis. And you've probably heard that the pensions promised to state employ-ees are terribly underfunded. And maybe you've even heard that most Americans don't have enough money in their 401(k)s.
Too often, these are three separate conversations. They shouldn't be. We don't just have a Social Security problem or a 401(k) problem. We have a retirement-security problem. And when we look at one or another piece in isolation--as most of the deficit-reduction proposals do--we run the risk of making it much worse. To be more specific, we run the risk of continuing the great risk shift of the last decades of the 20th century, in which uncertainty that was once borne by employers and the government has increasingly been shunted onto individuals.
Consider the 401(k). When Congress created the provision in 1978, it didn't realize it was going to transform the entire American pension system in less than a generation. But that's what happened. Employers were quick to recognize that the new plans were a safer bet than the defined-contribution plans that had dominated until then. In the old world, employers had to worry about saving enough to pay for their workers' retirement. In the new world, that responsibility fell on the workers themselves.
By 1995 there were more 401(k)-type plans than traditional defined-benefit plans. Now there are about twice as many. And as Robert Hiltonsmith, a policy analyst at the think tank Demos, documents in a new report, they're not working out that well.
Retirement experts say average workers approaching retirement need about $250,000 in their 401(k)s to maintain their standard of living. They don't have it. The number is closer to $98,000--not much more than a third of the recommended amount.
That's necessary context for the arguments over Social Security and state pensions. In both cases, most solutions don't solve the problem as much as they solve one of the problems: the government's balance sheet. But in doing so, they just shift the cost of retirement onto the individual. Already we're seeing the consequences. On average, baby boomers can expect to subsist on an income of about 77 percent of what they earned in their peak working years. …