10/19/2012 11:45 am ET Updated Dec 19, 2012

Rethink, Repair, Restart: Retirement

We are facing a "retirement crisis" in our nation. What was once a time of life that Americans looked to with great enthusiasm has now become a source of increasing angst. Put simply, people worry that they'll run out of money before they run out of life. National Save for Retirement Week begins on Sunday, October 21, so now is a good time to take stock of the current state of affairs and to consider solutions. The bottom line is that we need a retirement system that's fit for the realities of the 21st century.

The scale of the challenge is well-documented: Only 14 percent of Americans are "very confident" that they will have enough money for a comfortable retirement, and 60 percent of workers say they have less than $25,000 in retirement savings.

How did we get to this point? The 2008 financial crisis, the aging of the population, the inadequate personal savings rate, and the soaring cost of healthcare all get some of the blame for making people feel less confident about their financial security in retirement.

But one of the most significant factors is the demise of the traditional defined-benefit pension plan in the private sector over the past 30 years.

Today, the defined contribution plan -- particularly the 401(k) -- has become the primary means of saving for retirement in the private sector. But 401(k)'s were never intended to play that role -- they were designed to help Americans supplement employer-provided pensions.

There's a fundamental problem with this new model. Whereas once employers shouldered the responsibility and risks of funding retirement, today it's the workers who must bear that burden. Workers who may have no formal education or training in personal finance must save enough and manage their assets in a way that will generate a sufficient income to fund what may be decades of life in retirement. Yet studies have shown that many Americans have low levels of financial literacy, the skills and knowledge that enable people to make informed and effective financial decisions. So what does a retirement plan fit for the 21st century look like?

One model that is working well, and that can therefore inform our thinking, is the model commonly used in higher education. Primary defined contribution plans in higher education often boost savings levels through a combination of mandatory participation and employer contributions. Employees typically have access to either a defined benefit plan or an annuity that provides a level of guaranteed income in retirement. Employees also have access to an appropriate mix of investment options and to education programs and objective investment advice services to help support their decision-making.

It's not surprising that this model has resulted in higher confidence levels about retirement across higher education. Research from the TIAA-CREF Institute found that 80 percent of higher education employees are either "somewhat confident" or "very confident" that they will have enough money to live comfortably in retirement.

It is clear that changes need to be made in order to boost Americans' confidence in a financially secure retirement. To get there, we need a retirement system for the modern era, one that:

  • Recognizes that helping employees achieve financial security during retirement is a shared responsibility of employers and employees.
  • Provides predictable income that can last a lifetime -- throughout perhaps 20 to 30 years of retirement living -- by, for example, including a low-cost annuity as an investment and payout option.
  • Helps retirees meet their uninsured health care expenses -- which loom as a large financial burden as people live longer and often with chronic illnesses -- by, for example, including tax-advantaged savings programs for health-related expenses during retirement.
  • Recognizes that a "one-size-fits-all" approach won't work, given the demographic and other changes in our society. A new system could include targeted approaches for women, ethnic minorities, different age groups, different income groups, and people with multigenerational caregiving responsibilities.
  • Is sustainable even as the nearly 80 million Baby Boomers head into retirement over the next two decades, including features like automatic enrollment and automatic escalation that boost participation and contribution rates.
  • Includes strong education and advice components, recognizing that most people need help in making decisions about achieving retirement security.

The 21st century presents new economic and demographic challenges, and this requires a new model if Americans are to achieve long-term financial security. It's time to rethink, repair and restart our nation's retirement system.

ROGER W. FERGUSON JR. is president and CEO of TIAA-CREF, a financial services organization, and a former vice chairman of the U.S. Federal Reserve.