The economy is taking its toll on retirement security in America. The unexpected turbulence in traditional forms of saving -- from pensions to 401(k)s to homes -- deepens the profound savings challenge most Americans face in the coming decades. With diminished assets and an aging population, Americans will need to save more. At the same time, the financial market roller coaster is forcing people at or approaching retirement to rethink how to deal with the real risks they face in managing their retirement money. For many Americans, the question is not so much whether to save, but how.
The Better Days project, which I co-chair with Senator Harris Wofford, is about identifying ways to make saving for retirement easier and to help make retirement savings more secure. By bringing together diverse thinkers with a stake in the retirement challenge from foundations, think tanks, businesses, academics and policy makers across the political spectrum, we hope to generate an open dialogue around best practices and ideas to help all Americans save for their better days.
Experts have traditionally talked about retirement savings as a "three legged stool," with workers expected to fund one-third of their retirement income through Social Security, private pensions, and savings, respectively. In reality, Social Security has been and remains the base of retirement income for most people; nearly two-thirds of retirees rely on Social Security for more than half of their retirement income. The other two legs of the stool have been eroding steadily since the late 1970s.
There has been a systematic shift away from defined benefit (DB) pension plans, employer-sponsored plans that provide benefits often based on an employee's salary history and duration of employment, to defined contribution (DC) plans, in which employees have to put in their own money in vehicles such as 401(k)s and IRAs. According to the Center for Retirement Research at Boston College:
"In 1980, 60 percent of workers were covered by defined-benefit pension plans and just 17 percent relied on defined-contribution plans, such as a 401(k). By 2004, the numbers had changed dramatically: 11 percent of workers were covered by defined-benefit plans and 61 percent were covered by defined-contribution plans."
As more and more firms substituted DB plans with DC plans, market risk has been shifted from companies' balance sheets to individuals. In 1990, approximately the middle of the employer transition from offering DB plans as the primary retirement benefit to DC plans, 52 percent of IRA assets were invested in mutual funds and securities held in brokerage accounts. By the end of 2009, 82 percent of IRA assets, the majority of which are rollovers from employer-sponsored 401(k) plans, were invested in mutual funds and securities. Traditional savings vehicles, such as bank and thrift deposits, had declined from 42 percent of IRA assets in 1990 to 10 percent in 2009. As a result, households are much more exposed to market risk than ever before.
The motivation for the Better Days project is to address some of the challenges facing retirement security in a practical, proven, and non-partisan way. By bringing together diverse thinkers with a stake in the retirement challenge to participate in an open dialogue and debate on our website, we hope to encourage new ideas to surface and their merit to be tested in order to have a meaningful impact toward helping more Americans save for their Better Days.
John M. Bridgeland is CEO of Civic Enterprises and former director of the White House Domestic Policy Council. For more information, please visit the Better Days Project Website to join the discussion and share your ideas for a more secure retirement future for all Americans.