Shared Responsibility, Shared Risk: Government, Markets and Social Policy in the Twenty-First Century

By Jacob S. Hacker; Ann O’Leary | Go to book overview

11
Bigger and Better:
Redesigning Our Retirement System in the:
Wake of the Financial Collapse

ALICIA H. MUNNELL

The financial crisis has dramatically demonstrated how a collapse in equity prices can decimate retirement savings. The crisis has also highlighted the fragility of the existing retirement system, where 401(k) plans serve as the primary supplement to Social Security. Investing a portion of these 401(k) accounts in equities is a central tenet of any effective retirement saving strategy, because the higher expected return (higher than standard interest-bearing savings accounts) offers the potential for lower required contributions. But the upside of investing in equities comes with the risk of sudden and steep declines or extended periods of sluggish returns. Absorbing such blows is difficult in any circumstances. It is especially difficult given the large-scale shift in risk associated with retirement savings from employers to individuals that has occurred over the past quarter century. This chapter describes what would be involved in building a bigger and better retirement income system. The first section describes the evolution of today’s retirement programs, including the decline in Social Security replacement rates and the shift from defined benefit to defined contribution plans. The second section explores the challenges that individuals face when it comes to retirement saving decisions. The third section provides an overview of the impact of the financial collapse on the nation’s retirement plans. The fourth section describes recent public policy efforts to reform the existing system and concludes that they have had relatively little impact; the following section argues that the United States needs a new tier of retirement savings between Social Security and employer-sponsored plans, discusses what such an additional tier might look like, and describes the challenges of providing return guarantees as part of this new tier. The concluding section suggests that a better place to invest equities in an expanded retirement income system may be Social Security rather than the new tier. This section argues that with the ability to spread risk over a number of

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