The $25 Trillion System of Retirement Savings Needs Fixing
Few Americans today know much about Studebaker or Packard automobiles. Classic car aficionados recall their sleek, innovative designs, but the brands are also a reminder of another bygone era: the traditional defined benefit pension.
Studebaker and Packard merged in 1954 and later went out of business. Their pension plans were terminated, leaving thousands of workers without their expected benefits. That, along with other pension plan failures, prompted efforts to make retirement savings safer, culminating in federal legislation that has shaped much of the current retirement benefit landscape.
The Employee Retirement Income Security Act, or ERISA, which was signed into law in 1974 by President Gerald R. Ford, marks its 50th anniversary this year.
The law protected private sector pensions by imposing funding requirements, rules for employee eligibility and fiduciary standards requiring plan sponsors to act solely in the interest of its participants. It also created the Pension Benefit Guaranty Corporation, a federally sponsored insurance fund that backstops failing pension plans.
But those tighter requirements and costs led many employers to stop offering traditional pensions and to the rise of 401(k) plans and Individual Retirement Accounts and their dominance in the private sector today.
Pensions never covered all U.S. private sector workers — 62 percent were covered in 1983 compared with a mere 18 percent in 2022, according to the Center for Retirement Research at Boston College. But workers who had them benefited from automatic participation, professional investment management and guaranteed lifetime income streams.
In their place, I.R.A.s and workplace saving plans like 401(k)s have accumulated a staggering $25.4 trillion in assets. But much of that wealth is held by higher income households, and coverage is far from universal. What’s more, there are large gaps in retirement account ownership and participation by race, gender and ethnicity.
As ERISA turns 50, The New York Times asked experts for their wish list of ways to improve retirement security and make the system more equitable. Here are their ideas.
1. Expand 401(k) coverage
The biggest problem with 401(k) accounts? Not enough people have them, experts say. Only about half of private-sector U.S. workers are covered by an employer retirement plan at any given time, mainly because small businesses are less likely to offer the plans.
Most retirement saving is generated by automatic paycheck deductions, and the lack of access to plans helps explain why so many Americans near retirement with little saved. The median retirement account holdings for workers 55 to 64 years old was $185,000 in 2022, according to the Federal Reserve, and the amounts saved by low-income workers have actually fallen in recent years. There are also persistent disparities in savings by race and ethnicity, with Black households holding only 14 percent as much as white households, and Hispanic households just 20 percent compared with white households.
“We have a really large group of people who are going to retire only on Social Security,” said Alicia Munnell, director of the retirement research center at Boston College. Social Security is designed to replace only 40 percent of pre-retirement income for middle-income earners — far short of the 70 to 80 percent target that most planning experts recommend for retirees.
Seventeen states, including California, Illinois and Maryland, have stepped into the breach with legislation creating “auto-I.R.A.” programs designed to automatically enroll employees lacking a workplace savings plan. Contributions are sent via a paycheck deduction to a state-sponsored plan that manages the investments, but there is no matching employer contribution.
So far, eight states have begun their programs, and the combined assets total $1.5 billion.
A variety of national auto-I.R.A. plans have also been proposed, and some experts have even suggested a matching contribution by the government — in essence, a national 401(k) plan.
Some policymakers say such a proposal could cannibalize workplace 401(k)s.
“Employers sponsoring plans might decide to save the cost of employer contributions by dropping their plans, because they could move their employees into the public plan,” said Mark Iwry, who helped develop retirement savings proposals in the Clinton and Obama administrations. “Instead of giving up on the private retirement saving system, we should continue reforming it and expanding its coverage,” he added.
2. Make 401(k)s more like pensions
Some want to improve 401(k)s by making them a bit more like traditional pensions. That means importing features like automatic participation, professional investment management and guaranteed income streams in retirement.
Large 401(k) plans are already there. Three-quarters of large plans now automatically enroll new employees by default (though they may opt out). For example, at plans administered by Vanguard, the 401(k) giant, the percentage of enrolled employees rose to 82 percent in 2023 from 75 percent in 2013.
Federal legislation in 2019 and 2022 contained dozens of changes to workplace retirement plans, including new investment options. Critics argue that much of the benefit has flowed to the financial services industry and high earners, but one significant exception is a redesigned saver’s match that provides for a government matching contribution up to $1,000 annually for lower-income earners.
Another objective: Help retirees convert nest eggs into predictable income streams. “It just doesn’t work to say, ‘Here’s your money, have a great time,’” said David John, a nonresident senior fellow at the Brookings Institution.
Toward that end, some 401(k)s have begun integrating annuities — a financial product that can guarantee a fixed income for life — into their offerings.
3. Ensure better I.R.A. investment advice
In employer plans, workers benefit from ERISA’s fiduciary protections. But Individual Retirement Accounts fall outside that rule because they aren’t managed by employers, and I.R.A.s hold more money ($14.3 trillion in the first quarter of this year) than defined contribution plans ($11.1 trillion), according to the Investment Company Institute.
“Congress left the barn door open, and I.R.A.s are running away with the show,” said Mr. Iwry.
Much of the money in I.R.A.s is rolled over from workplace plans, and the Department of Labor recently finalized a rule that requires more financial professionals to act as fiduciaries when they advise people on investments that roll over from workplace plans to I.R.A.s. Retail investment in securities is already covered by a “best interest” regulation adopted by the Securities and Exchange Commission, but this new rule adds fiduciary duty for advice on investments in other areas, like commodities and real estate.
“The core conditions of the rule are that you don’t lie to your customers, you don’t overcharge them, and you put their interests first and you provide prudent advice,” said Ali Khawar, the Labor Department’s principal deputy assistant secretary of the Employee Benefits Security Administration. “And you have to acknowledge that you are acting as a fiduciary.“
The new rule takes effect in September, although some financial services companies have vowed to fight it in court.
4. Rework the system to make it more equitable
The tax-deferral features of 401(k) and I.R.A. accounts are designed to encourage saving. But it’s a benefit bestowed largely on upper-income households.
The Treasury estimates that employer-sponsored retirement plans and I.R.A.s reduced federal income taxes by as much as $189 billion in 2020. A study by the Center for Retirement Research found that 59 percent of that tax deferral benefited the top fifth of earners, compared with just 3.7 percent for the bottom 40 percent of earners.
“People need workplace retirement plans, because money coming out of a paycheck is the only way that people save,” said Dr. Munnell, of the retirement center. But “what we should really do is focus on the unlucky people who don’t have retirement savings to supplement Social Security.”
Dr. Munnell and the co-authors of her study, including Andrew Biggs, a conservative economist and senior fellow at the American Enterprise Institute, conclude by offering this bold proposal: End tax deferral on savings — or at least cap it. Then use that tax revenue to help fund Social Security. This shift could close a substantial portion of the shortfall that Social Security currently faces.
“If we have scarce resources, I would like to see those dollars go to the people in the bottom half of the income distribution,” Dr. Munnell said.
5. Expand Social Security with new sources of revenue
Progressive advocates would go further than simply addressing Social Security’s shortfall. They argue that a substantial expansion of benefits is the only meaningful way to close the retirement income gaps facing low- and middle-income people.
Shifting the retirement savings tax subsidies to Social Security is just a start, said Nancy Altman, president of Social Security Works.
“Let’s also take the tax breaks away from the fossil fuel industry, and use those savings to fund Social Security,” she said. She would also lift the cap on the amount of wages subject to payroll taxes and tap other revenue sources.
New revenue would be used to eliminate Social Security’s shortfall and expand benefits. Targeted increases would go toward very low-income retirees, but Ms. Altman also would bolster Social Security checks across the income spectrum, to provide up to 80 percent of pre-retirement income for low earners, and up to 72 percent for medium earners.
“The question,” she said, “is what level of economic security do we want to provide ourselves collectively through this structure?”
