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Is the American Retirement System Succeeding?

One of my clients recently forwarded to me an interesting article about the American retirement system.  The economist quoted in the article says the system is failing and the blame is squarely on the 401k system that most of us now use to save for retirement. She correctly points out that most Americans are simply not wired for the complexities of choosing investments for their own retirement. Furthermore, I would argue that most do not even know how much they should be saving for their own retirement.

The pension model from what seems to be a bygone era actually worked quite well. With a defined benefit plan the employer would put money aside for you in a safe place and based on your pay and years of service you would be entitled to a pension upon retirement. Most companies have found that they could save money and shift the risk to the employees by utilizing a 401k plan. Unfortunately for their employees, most folks simply do not know how much they need to save, or how to invest what money is in their 401k.

As the economist in the article points out, Social Security is simply not enough for many folks once they stop working. There has been debate in political circles about privatizing Social Security. Those who argue in favor of this talk about giving control to individuals over the own money. Given how poorly the shift from pensions to 401ks has worked, I find this to be a terrible idea. The economist raises an interesting point about forcing people to save more. I think this is a great idea. As a compromise between those who are for and against private accounts, it would seem that private accounts could be added to Social Security. In other words, keep the current system that guarantees a certain benefit, and then collect an extra percentage of workers’ income to be placed into a private account. I would even favor a partial government match of these ‘forced’ savings. Of course, in the current political environment this proposal may not go very far!

As an additional note on Social Security, I do think it is going to be necessary to raise the retirement age. The reality is that most Americans are living longer (a good thing!) and increasingly, we are becoming a knowledge economy where more and more workers are using their brains to make a living and not their hands. What about those with physically demanding jobs? Certainly those folks will be harmed by raising the retirement. But, a supplemental private account could make up the difference.

Finally, as more and more folks are using their brains to make their living, I think we need to readjust what retirement even means. Traditional thinking is that when you reach a certain age you simply stop working. Increasingly, more people are deciding to continue with work either full time or part time. While some might argue that it is for financial reasons, I think many people continue to work for psychic reasons. In my opinion we would have a much happier and healthier society if folks planned to continue working as long as they are able to. Think of the amount of knowledge and wisdom that can continue to be passed on to the younger generation. Plus, the added bonus of a more secure financial situation later in life for many people.

So, what do you think? Is the system failing? Should Social Security be privatized? Of should the government actually expand Social Security and add private accounts on top of the current system? Let me know what you think.

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