We hear a lot these days about the supposed inadequacy of
401(k)s and other defined contribution plans for providing income for American workers
in retirement. Those who are most critical
sometimes reveal a soft spot for the defined benefit (DB) pension plan, the “no
worries” retirement plan designed to provide long-tenured workers with a
guaranteed income after leaving the workforce.
Many overlook the fact that, even in the DB heyday, workforce mobility
resulted in many, many workers never qualifying for that “large” pension
check.
The truth is, neither the 401(k) nor the DB plan was created
to be only leg upon which a retiree would stand during retirement. The classic model as many are aware is
actually a “three-legged stool.” In
addition to an employer-sponsored retirement plan, the other two legs of this
stool – by tradition – are Social Security, and additional personal savings and
assets of the worker. Together this
three-legged stool would support a reasonably secure retirement.
As much as we may be frustrated by some academics,
think-tank specialists and lawmakers who feel we need a paternalistic, mandated
government-run program that guarantees benefits to retirees, we don’t doubt they
are sincere in their goal of helping people achieve a secure retirement. But
with the budget woes in which our country is mired, and the extremely divided
political climate, a European-style universal defined benefit pension system is
not realistic. Even if that would be desirable.
But before wringing our hands and running for cover,
accompanied by shouts of “the sky is falling,” let’s consider some data that
suggests that things may not be as bleak as some profess. The data is presented in an article recently appearing
in the Wall Street Journal. It was
jointly written by Sylvester Scheiber, a former Chairman of the Social Security
Advisory Board and now an independent pension consultant, and Andrew Biggs, former
Deputy Commissioner of the Social Security Administration and currently
Resident Scholar at the American Enterprise Institute.
Scheiber and Biggs point out that the data most often cited
to measure the magnitude of qualified plan and IRA payments to U.S. retirees is
greatly understated. How so? Proposals to revamp the retirement saving system
that originate in Congress, or in the halls of academia, routinely cite
retirement income figures from the U.S. Census Bureau’s Current Population
Survey, or CPS. But Scheiber and Biggs note
that CPS data counts only Social Security benefits and scheduled periodic payouts
from retirement accounts – typically annuitized balances in IRAs and defined
contribution plans – and DB plan payouts.
The” as-needed” or irregular withdrawals are not counted,
say Scheiber and Biggs, and are huge.
They should know, because they compared CPS retirement payment figures
to Internal Revenue Service data on IRA and employer plan distributions, which
are required to be reported annually – on pain of penalty – on IRS Form 1099-R,
Distributions from Pensions, Annuities,
Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.
Examples of their findings include the following. CPS data for 2008 reported $222 billion in
“pension or annuity income.” IRS
retirement plan and IRA reporting forms showed $457 billion. Given the fact that most large balances in employer-sponsored
plans are destined to eventually be rolled over to IRAs, where they will probably
not be annuitized, accurate IRA estimates are extremely important. But CPS data is even more suspect here. In 2008 the CPS reported $5.6 billion in
IRA-derived income. But, according to
Scheiber and Biggs, retirees themselves reported $111 billion in IRA
distribution income on their tax returns.
The two former Social Security officials contend that the
CPS not only misses at least 60 percent of the IRA and employer plan income being
delivered to retirees, but greatly underestimates the share of the U.S.
workforce that has an opportunity to participate in an employer plan. CPS reports that roughly one-half of all U.S.
workers have this opportunity, yet Scheiber and Biggs note that the Social
security Administration’s analysis of Form W-2 data places the figure at over
70 percent.
Can the U.S. retirement system be made better? Certainly.
We can retain and enhance incentives for employers to establish plans
and encourage early participation, embrace automatic employee enrollment and
automatic escalation of employee contributions.
Perhaps create an automatic IRA program for employers not yet ready for
the deep end of the pool. These are things
that can make a good system even better.
Let’s consider these, while at the same time recognizing the true magnitude of benefits being
delivered now, before we throw the baby out with the bath water.
