LEADING BY EXAMPLE

Posted in Quick Hits on June 3rd, 2010 by Ed

I'm going to dispense with the foreplay today and get directly to the point on account of a Stanley Cup hangover. That is not what it sounds like, being neither a literal hangover (no alcohol was involved) or juvenile slang for some kind of unlikely sex act. It is simply the lack of energy one feels after four hours of emotionally charged playoff hockey.

So the Baby Boomers, the generation that brought us Social Security privatization and phasing out the few pension plans they didn't bankrupt, love them some 401(k)s. Saving for retirement isn't the government's business or employers' responsibility. We'll all save for our own retirements and our golden years will be full of vacations and luxury cars and cruises and the extra-swanky $14.99 buffet at the Golden Nugget. That sounds swell.

Unfortunately most Americans earn dick, hence even at 10-15% of their income 401(k)s or other similar retirement plans accumulate precious little savings. The average middle class couple needs a cool million dollars to retire comfortably, assuming one lives for 20 more years after retiring, although millions of retirees obviously get by on far less and will continue to do so. Is anyone actually saving that much?

According to this very thorough report from the Employee Benefit Research Institute, the average 401(k) plan is valued at around $80,000. The median value is less than $60,000. So more than half of Americans who are engaged in these pre-tax withholding savings plans have accumulated barely enough to last a few years in retirement. They'll still be living off Social Security, in essence, unless they are lucky enough to have a pension that isn't bankrupt.

True, mean/median aren't great statistics here because many young people with 401(k)s haven't had the time to accumulate a decent balance. But note (p. 12) the average balance for individuals over 60 who have had a 401(k) for more than thirty years: $179,573. Sure, that's a nice piece of change, but when you start doing the math it doesn't amount to much over the 15-20 years most people expect/hope to live in retirement. Given that the $180,000 figure is an average and thus distorted by individuals with very large accounts, we can safely assume that the majority of plan holders have far less saved. Even if people are contributing the recommended 15% of their earnings into a 401(k) (and it is reasonable to doubt that many are) the problem with this grand design is that 15% of not much is…not much.

In short, people who are retiring in the next ten years can talk all they want about "saving for retirement" but the fact remains that the majority of them would be quite screwed without employee pension plans and/or Social Security. And it's not simply a question of needing more time to let the savings add up – even over 30+ years it's unlikely that most working Americans can save enough in this kind of scheme to continue their working-age lifestyle into a retirement of any appreciable length. Plus, unlike pensions, 401(k)s have that added benefit of forcing people to put off retirement for a few years until the stock market isn't in the tank.

Chalk up another victory for the free market. Down with socialist old age welfare plans! Unburden our businesses of costly pension obligations! Americans' robust personal savings habits combined with the genius of privately-administered investing schemes will guarantee our standard of living in retirement.