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The Looming Retirement Crisis and What to Do About It

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In The New York Times' Sunday Review, Teresa Ghilarducci, an economics professor at the New School for Social Research and an expert in retirement policies, does a pretty good job of leveling the retirement system in the U.S. It's probably necessary, but there's a ritualistic quality to her denunciation. She offers the usual horrific statistics: 75 percent of Americans nearing retirement age had less than $30,000 in their retirement accounts. There's the daunting reality of how much you'll need to happily retire for, say, 20 or 30 years, the famous "number": "To maintain living standards into old age we need roughly 20 times our annual income in financial wealth." And she touches on longevity and its costs. She actually goes easy on us. She doesn't dwell on the demographic consequences of an aging society, the destruction of real estate values in the financial crisis (real estate being most Americans' largest asset) and the shifting risk-reward equation of the equity markets (equities being the preponderance of assets in retirement plans). She doesn't dwell on threats to Medicaid and Medicare, or Social Security, or on the fact that most defined contribution plans have grown meaner, though more complex, often by eliminating matching. In fact, her attitude toward Social Security is not to even factor it into your calculations. And she doesn't touch on the kind of big-ticket expenditures that tend to hit many people in the years before retirement: spiraling medical and college costs.

She does offer up the most striking conclusion from this vast social experiment that began somewhere in the late '70s: It doesn't work -- and it will never work. Granted, this has been obvious for a while. Nonetheless, as defined benefits plans submerge into extinction and in the absence of another viable option, it continues to be national policy. The largest demographic in American history is now lurching into retirement poor (although the first to enter will have a larger portion of old-fashioned, defined-benefit pensions, from unions and corporations):

Not yet convinced that failure is baked into voluntary, self-directed, commercially run retirement plan systems? ... As we all know, these abilities [to save and invest effectively] are not common for our species. The current model for retirement savings, which forces individuals to figure out a plan for their retirement years, whether through a 'guy' or by individual decision making, will always fall short.

The parallels with health care are striking; they are also deeply linked, of course. You don't want folks self-diagnosing or self-treating; the result to the system will be even higher costs as sicker patients hit emergency rooms. It's simply unreasonable to expect financial expertise in most people, particularly as they're barraged by masses of advice, little of which they understand. The self-directed retirement system was built on the notion that in the long run equities will outperform. The trouble is, that notion, which was true of a relatively fast-growing American economy, falls apart as deeper macroeconomic woes emerge. The kind of volatility we've seen since 1999 devastates retirement accounts, particularly for older workers. It also reduces participation, particularly for younger workers who must begin saving and investing early for the whole machine to work. Without the long-term belief in equities, everything falls apart. How can you support that belief in long-term investing in an economy that has seen such great wealth created by short-term trading?

For most people, the closest they come to the financial economy is the home mortgage and the 401(k). Both have been problematic. (Even if the documentation is simple and transparent, many people will struggle to deal with these financial products.) The argument behind the defined-contribution plan is that Americans need to be self-reliant and accountable. Personal investing gives everyone a stake in an "ownership society" -- as if that isn't the case anyway. And personal investing was viewed as a way to broaden "ownership" in American companies. What no one foresaw three decades or so ago is how these demands would change American culture. There were the obvious, and often contradictory, developments: the rise of a personal-finance media, which juggled readable stories about fund picking and speculation with the usual boring nostrums about investing for the long-term. Like everyone else, the personal-finance press fell for various tech and real estate bubbles. And it spawned the notion of business as an exciting game, played out every day on CNBC or Fox Business. And, directly and indirectly, it helped reshape wholesale finance. The first sign of this retail financialization was the rise of nonbank money market funds in the '80s and the widespread national frenzy over S&L certificates of deposit, which was a symptom, though not a cause, of the S&L crisis. Defined contribution plans were a powerful form of disintermediation, driving some of the consolidation and diversification of the banks. It swelled institutions like Fidelity and Vanguard and the deification of investing stars, like Peter Lynch or Warren Buffett. It created the strange beast -- the instividual. Most retirement investors put their money in institutions, making them arguably the most powerful institutional force in finance. Besides creating a vast army of rentiers, with all that that meant politically (a fertile subject that's never been full explored), it helped power the transformation of corporations from stakeholder to shareholder model.

I could quibble with a few aspects of Ghilarducci's column. She too falls into the mistake of the personal-finance media and talks in incredibly broad generalities. What does her notion of the number -- 20 times income -- mean? The retirement years, like every other part of life, involve change. Do you really need to replicate your highest income? Your kids may have left the house, which you may have sold; your taxes are lower. Your expenses (beyond health care, which is a big issue) decrease in time as energies flag. You don't have college costs; your food bill declines. Why does this matter? Because I think many people find these numbers so daunting they give up, particularly if they haven't diligently salted money away at the start. It seems impossible, so why try? Such a number also drives folks to take on more risk, play with their 401(k) or buy lottery tickets every week.

In the end, Ghilarducci pumps for a kind of mandated retirement program for everyone that would sit atop Social Security. She may be right, though the politics of this are very difficult. She argues, for instance, that the retirement problem is shared, so the solution should be as well. There are, in fact, many shared aspects, which we discover when markets fall. But the voluntary aspect of the current system opens the door to arguing that "other" folks don't save and "waste" their money on vacations, homes or fancy schools for their kids. Like health care, the issue will be defined as one of freedom versus government control. Why should I be restrained? She also doesn't offer many details. These accounts would be professionally managed, which I don't necessarily find confidence building. They would get a guaranteed rate of return and pay out as annuities. But who would fill the gap if -- well, when -- those returns were not met? Who would set the returns? In other words, is this just another pension problem? What, in fact, would be the difference between Social Security and these accounts except that the former would involving inter-generational transfers and the money in the latter would come from the individual? Would that mean that the more you made the more you would get in return?

If the experiment in defined-contribution plans taught us anything, we don't share nicely. It'll take a very large crisis to change that.

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Robert Teitelman is editor in chief of The Deal magazine.