May is college graduation month, which means that over 2.5 million cap- and-gown-clad young Millennials will be walking across the stages of their colleges and universities into the "adult world" where, like generations before them, they'll be expected to find a job, raise a family and keep a roof over its head, and somehow manage to squirrel away enough savings to retire comfortably one day--or just support themselves when they're discarded by the labor market for a newer, shinier generation of workers.
Successfully navigating the hazards and pitfalls of life to a comfortable retirement has always been difficult, but for these new graduates and their peers accomplishing such a feat will border on the impossible.
Because over the last generation, our society has shifted the burden of an unprecedented set of risks onto individual workers, and the Millennials will be the first generation to suffer the full brunt of that shift. This volatile mix of grim employment and earnings prospects (even for college graduates), massive student loan debt, spiraling medical costs, soaring gas prices, and looming climate change is absolutely unprecedented in our nation's history.
Let's be very clear: this "Great Risk Shift," as coined by Jacob Hacker, is in reality a very dangerous social experiment with completely unknown results. At the very least, these interlinked risks will make life significantly harder for Millennials. However, there is a very real possibility that these risks combined will cause the collapse of the very pillars and institutions that make America great.
To add insult to injury, even if Millennials somehow successfully navigate all of these risks and manage to save for retirement, they will be forced to do so mostly through the costly, risky individual retirement system of 401(k)-type plans and IRAs, which will make it impossible for even those fortunate workers able to save for retirement to save enough.
Retirement plan coverage itself isn't the problem. According to the Current Population Survey, 48 percent of workers, ages 25 to 34, were covered by a retirement plan at work in 2010, compared to 53 percent of all workers.
The barrier prohibiting Millennials from saving for retirement is the type of retirement plan. According to the 2007 Survey of Consumer finances, just 17 percent of workers, ages 25 to 34, were covered by a traditional defined benefit pension plan, compared to 26 percent of all workers. The overall fraction of workers covered by traditional pensions has dropped precipitously in the past generation. In 1980, more than half of all workers had this type of plan.
Why are defined benefit plans so important to retirement security? They offer a secure stream of lifetime income generally based on years of service, not often variable or nonexistent employee/employer contributions. Workers generally cannot dip into traditional pension plans before retirement, unlike 401(k)s, whose balances workers often use for reasons other than retirement. Also, defined benefit plan assets are pooled, allowing plan investment managers to generate higher returns by paying lower fees and investing over a longer span. 401(k)-type plans, in contrast, force workers to shoulder all of the risks and costs of saving for retirement.
Between the risks of an uncertain stock market, poor investment choices, savings-depleting early withdrawals, and the high fees of many 401(k)-type plans, it will be difficult to impossible for the majority of Millennials who only have these plans supplementing Social Security to save enough to retire with dignity, let alone comfort. High 401(k) fees, in particular, will make saving for retirement especially challenging. In a just-released study, Dēmos has calculated that fees for the average 401(k) plan can cost a two-earner, median-income household as much as $155,000 in fees and lost returns over a lifetime of saving for retirement.
What, then, does the future look like for Millennials?
If the status quo holds, here's the most likely scenario: this generation, larger even than the Baby Boomers, will reach retirement age in 40 years with nearly no retirement savings. Low wages, big medical bills, and suffocating student debt burdens will make it difficult or impossible for most Millennials to save for retirement, even those receiving their college degrees this month. The few who do manage to occasionally set aside a few dollars will have their retirement nest eggs depressed by a lackluster stock market and frequent early withdrawals from their retirement accounts as a way to pay for stints of unemployment or unexpected medical bills. Most will retire with Social Security (which will hopefully still be there for them) as their only source of retirement income, drastically raising elderly poverty, potentially to even pre-Social Security levels.
Is this the future that our country wants for its young people? I sure hope not. But we better take action--big, drastic, systemic action--soon if we're to have a hope of avoiding it. One huge and nearly costless step that could be taken right now would be for the federal government to create--or even better, for it to allow states to create--a new type of retirement savings account, one that would give workers a safe, low-cost place to save for retirement and offer some protection against outliving one's retirement savings. Restoring some measure of retirement security to workers wouldn't alone fix the mess that Millennials have been handed, but it would be a great start.
Robert Hiltonsmith is a retirement security expert and Policy Analyst at the national public policy organization Demos, based out of NYC. He is the author of the new Demos report "The Retirement Savings Drain: The Hidden & Excessive Costs of 401(k)s"