Still, she worries about her future. Forbus would like to stop working when she is 65. She has no big retirement dreams — she is not planning to move to Florida or to take extravagant vacations. She hopes to spend her later years enjoying family and friends and pursuing different hobbies. But she knows that she hasn’t set aside enough money to ensure that she can realize even this modest ambition.
But even if the stock market delivers blockbuster returns over the next 15 years, her goal is going to be difficult to reach — and this assumes that she doesn’t have a catastrophic setback, like losing her job or suffering a debilitating illness.
She also knows that markets don’t always go up. During the 2008 global financial crisis, her 401(k) lost a third of its value, which was a scarring experience. From the extensive research that she has done, Forbus has become a fairly savvy investor; she’s familiar with all of the major funds and has 60 percent of her money in stocks and the rest in fixed income, which is generally the recommended ratio for people who are some years away from retiring. Still, Forbus would prefer that her retirement prospects weren’t so dependent on her own investing acumen. “It makes me very nervous,” she concedes. She and her friends speak with envy of the pensions that their parents and grandparents had. “I wish that were an option for us,” she says.
The sentiment is understandable. With pensions, otherwise known as defined-benefit plans, your employer invests on your behalf, and you are promised a fixed monthly income upon retirement. With 401(k)s, which are named after a section of the tax code, you choose from investment options that your company gives you, and there is no guarantee of what you will get back, only limits on what you can put in. This is why they are known as defined-contribution plans. Pensions still exist but mainly for unionized jobs. In the private sector, they have largely been replaced by 401(k)s, which came along in the early 1980s. Generally, contributions to 401(k)s are pretax dollars — you pay income tax when you withdraw the money — and these savings vehicles have been a bonanza for a lot of Americans.
Not all companies offer 401(k)s, however, and millions of private-sector employees lack access to workplace retirement plans. Availability is just one problem; contributing is another. Many people who have 401(k)s put little if any money into their accounts. With Americans now aging out of the work force in record numbers — according to the Alliance for Lifetime Income, a nonprofit founded by a group of financial-services companies, 4.1 million people will turn 65 this year, part of what the AARP and others have called the “silver tsunami” — the holes in the retirement system are becoming starkly apparent. U.S. Census Bureau data indicates that in 2017 49 percent of Americans ages 55 to 66 had “no personal retirement savings.”
The savings shortfall is no surprise to Teresa Ghilarducci, an economist at the New School in New York. She has long predicted that the shift to 401(k)s would leave vast numbers of Americans without enough money to retire on, reducing many of them to poverty or forcing them to continue working into their late 60s and beyond. That so many people still do not have 401(k)s or find themselves, like Jen Forbus, in such tenuous circumstances when they do, is proof that what she refers to as this “40-year experiment with do-it-yourself pensions” has been “an utter failure.”
It certainly appears to be failing a large segment of the working population, and while Ghilarducci has been making that case for years, more and more people are now coming around to her view. Her latest book, “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy,” which was published in March, is drawing a lot of attention: She has been interviewed on NPR and C-SPAN and has testified on Capitol Hill.
It is no longer just fellow progressives who are receptive to her message. Ghilarducci used to be an object of scorn on the right, once drawing the megaphonic wrath of Rush Limbaugh. Today, though, even some conservatives admit that her assessment of the retirement system is basically correct. Indeed, Kevin Hassett, who was a senior economic adviser to President Trump, teamed up with Ghilarducci not long ago to devise a plan that would help low- and middle-income Americans save more for retirement. Their proposal is the basis for legislation currently before Congress.
And Ghilarducci recently found her critique being echoed by one of the most powerful figures on Wall Street. In his annual letter to investors, Larry Fink, the chairman and chief executive of BlackRock, one of the world’s largest asset-management companies, wrote that the United States was facing a retirement crisis due in no small part to self-directed retirement financing. Fink said that for most Americans, replacing defined-benefit plans with defined-contribution plans had been “a shift from financial certainty to financial uncertainty” and suggested that it was time to abandon the “you’re on your own” approach.
While that isn’t likely to happen anytime soon, it seems fair to ask whether the country as a whole has been well served by the 401(k) revolution. The main beneficiaries have been higher-income workers; instead of making an economically secure retirement possible for more people, 401(k)s have arguably become another driver of the inequality that is a defining feature of American life.
***
When it comes to generating wealth, 401(k)s have been an extraordinary success. The Investment Company Institute, a financial-industry trade group, calculates that the roughly 700,000 401(k) plans now in existence hold more than $7 trillion in assets. But the gains have gone primarily to those who were already at or near the top. According to the Federal Reserve, the value of the median retirement-saving account for households in the 90th to 100th income percentile has more than quintupled during the last 30 years and is currently more than $500,000. In one sense, it is not surprising that the affluent have profited to this degree from 401(k)s: The more money you can invest, the more money you stand to make.In 2024, annual pretax contributions for employees are capped at $23,000, but with an employer match and possibly also an after-tax contribution (which is permitted under some plans), the maximum can reach $69,000. Workers 50 and over are also allowed to kick in an additional $7,500, potentially pushing the total to $76,500. Needless to say, only a sliver of the U.S. work force can contribute anything like that to their 401(k)s.
The withdrawal rules have evolved in a way that also favors high earners. You are generally not supposed to begin taking money from a 401(k) before you are 59½; doing so could incur a 10 percent penalty (on top of the income-tax hit). What’s more, you can now put off withdrawing money until age 73; previously, you had to begin drawing down 401(k)s by 70½. Those extra years are an added tax benefit for retirees who are in no rush to tap their 401(k)s.
People in lower-income brackets may have also made money from 401(k)s but hardly enough to retire on with Social Security. In 2022, the median retirement account for households in the 20th through 39th percentile held just $20,000. For this segment of the working population, 401(k)s sometimes end up serving a very different purpose. They become a source of emergency funds, not retirement income. But then, for many of these people, retirement seems like an impossibility.
Laura Gendreau directs a program called Stand by Me, a joint venture between the United Way of Delaware and the state government that provides free financial counseling. She says that when she asks clients if they are putting aside any money for retirement, they often look at her in disbelief: “They say, ‘How do you expect me to save for retirement when I’m living paycheck to paycheck?’” She and her colleagues try to identify expenditures that can be eliminated or reduced so that people can start saving at least a small portion of what they earn. But she says that some clients are having such a hard time just getting by that they can’t fathom being able to retire. Sometimes it does not even occur to them to look into whether their employers offer 401(k)s. “They have no idea,” Gendreau says.
Ghilarducci has been hearing this sort of thing for years. Her career in academia began around the time that 401(k)s first emerged, and from the start, she regarded these savings plans with skepticism. For one thing, she feared that a lot of people would never have access to them. But she also felt that 401(k)s were unsuitable for lower-income Americans, who often struggled to save money or who might not have either the time or the knowledge to manage their own investments. In her judgment, the offloading of retirement risk onto workers was worse than just an economic misstep — it represented a betrayal of the social contract. (...)
In 2008, Ghilarducci proposed replacing 401(k)s with “guaranteed retirement accounts,” a program that would combine mandatory individual and employer contributions with tax credits and that would guarantee at least a 3 percent annual return, adjusted for inflation. Her plan drew the wrath of voices on the right — the conservative pundit James Pethokoukis called her “the most dangerous woman in America.”
But her timing proved to be apt: That year, the global financial crisis imperiled the retirement plans of millions of Americans. Ghilarducci suggested that if the government was going to bail out the banks, it also had an obligation to help people whose 401(k)s had tanked. Her idea inflamed the right: Rush Limbaugh attacked her during his daily radio show, which brought her a wave of hate mail.
Her hostility to 401(k)s is partly anchored in a belief that when it comes to retirement, the country was on a better path in the past. In the 1950s and 1960s, many Americans could count on pensions and Social Security to provide them with a decent retirement. It was a different era, of course — back then, men (and it was almost always men) often spent their entire careers with the same companies. And even at their peak, pensions were not available to everyone; only around half of all employees ever had one. Still, in Ghilarducci’s view, it was a time when the United States put more emphasis on the interests of working-class Americans, including ensuring that they could retire with some degree of economic security.
She portrays the move to defined contribution retirement plans as part of the sharp rightward turn that the United States took under President Ronald Reagan, when the notion of individual responsibility became economic dogma — what the Yale University political scientist Jacob Hacker has called “the great risk shift.” The downside of this shift was laid bare by the great recession. Many older Americans lost their savings and were forced to scavenge for work.
This was the subject of the journalist Jessica Bruder’s book “Nomadland,” for which Ghilarducci was interviewed and that was the basis for the Oscar-winning film of the same title. To Ghilarducci, the portraits in “Nomadland” — of lives upended, of the indignity of being old and having to scramble for food and shelter — presaged the insecure future that awaited millions of other older Americans. And Ghilarducci believes that with record numbers of people now reaching retirement age, that grim future is arriving.
People in lower-income brackets may have also made money from 401(k)s but hardly enough to retire on with Social Security. In 2022, the median retirement account for households in the 20th through 39th percentile held just $20,000. For this segment of the working population, 401(k)s sometimes end up serving a very different purpose. They become a source of emergency funds, not retirement income. But then, for many of these people, retirement seems like an impossibility.
Laura Gendreau directs a program called Stand by Me, a joint venture between the United Way of Delaware and the state government that provides free financial counseling. She says that when she asks clients if they are putting aside any money for retirement, they often look at her in disbelief: “They say, ‘How do you expect me to save for retirement when I’m living paycheck to paycheck?’” She and her colleagues try to identify expenditures that can be eliminated or reduced so that people can start saving at least a small portion of what they earn. But she says that some clients are having such a hard time just getting by that they can’t fathom being able to retire. Sometimes it does not even occur to them to look into whether their employers offer 401(k)s. “They have no idea,” Gendreau says.
Ghilarducci has been hearing this sort of thing for years. Her career in academia began around the time that 401(k)s first emerged, and from the start, she regarded these savings plans with skepticism. For one thing, she feared that a lot of people would never have access to them. But she also felt that 401(k)s were unsuitable for lower-income Americans, who often struggled to save money or who might not have either the time or the knowledge to manage their own investments. In her judgment, the offloading of retirement risk onto workers was worse than just an economic misstep — it represented a betrayal of the social contract. (...)
In 2008, Ghilarducci proposed replacing 401(k)s with “guaranteed retirement accounts,” a program that would combine mandatory individual and employer contributions with tax credits and that would guarantee at least a 3 percent annual return, adjusted for inflation. Her plan drew the wrath of voices on the right — the conservative pundit James Pethokoukis called her “the most dangerous woman in America.”
But her timing proved to be apt: That year, the global financial crisis imperiled the retirement plans of millions of Americans. Ghilarducci suggested that if the government was going to bail out the banks, it also had an obligation to help people whose 401(k)s had tanked. Her idea inflamed the right: Rush Limbaugh attacked her during his daily radio show, which brought her a wave of hate mail.
Her hostility to 401(k)s is partly anchored in a belief that when it comes to retirement, the country was on a better path in the past. In the 1950s and 1960s, many Americans could count on pensions and Social Security to provide them with a decent retirement. It was a different era, of course — back then, men (and it was almost always men) often spent their entire careers with the same companies. And even at their peak, pensions were not available to everyone; only around half of all employees ever had one. Still, in Ghilarducci’s view, it was a time when the United States put more emphasis on the interests of working-class Americans, including ensuring that they could retire with some degree of economic security.
She portrays the move to defined contribution retirement plans as part of the sharp rightward turn that the United States took under President Ronald Reagan, when the notion of individual responsibility became economic dogma — what the Yale University political scientist Jacob Hacker has called “the great risk shift.” The downside of this shift was laid bare by the great recession. Many older Americans lost their savings and were forced to scavenge for work.
This was the subject of the journalist Jessica Bruder’s book “Nomadland,” for which Ghilarducci was interviewed and that was the basis for the Oscar-winning film of the same title. To Ghilarducci, the portraits in “Nomadland” — of lives upended, of the indignity of being old and having to scramble for food and shelter — presaged the insecure future that awaited millions of other older Americans. And Ghilarducci believes that with record numbers of people now reaching retirement age, that grim future is arriving.
by Michael Steinberger, NY Times | Read more:
Image: Tim Enthoven
[ed. I don't have enough insight into other people's experiences to make anything other than broad generalizations, but having a defined benefit retirement plan (which pays out a defined monetary benefit each month, like Social Security) has been one of the luckiest of lucky situations I've ever stumbled into. When 401k's were first introduced I imagined them as a gift to Wall Street - people being forced into the market with nothing but their own financial investing accumen to guide them into retirement security. Maybe you'd make out great, maybe not. If you were into investing, it might've looked like a great opportunity. But even then it was obvious that risk was being transfered from employers to employees, since many if not most employers had a contractual, and sometimes constitutional, obligation to provide a guaranteed retirement income based on job class and years of service. It probably worked out well for some with enough income to invest, but it was clear even to someone as oblivious as me (who didn't much care about financial matters or could even imagine retirement back then) that most people probably wouldn't have either the funds, insight, interest, or sophistication to manage all the various complexities involved in guiding and growing their own retirement accounts. And so it has come to pass. Read the comments for other perspectives.]
Image: Tim Enthoven
[ed. I don't have enough insight into other people's experiences to make anything other than broad generalizations, but having a defined benefit retirement plan (which pays out a defined monetary benefit each month, like Social Security) has been one of the luckiest of lucky situations I've ever stumbled into. When 401k's were first introduced I imagined them as a gift to Wall Street - people being forced into the market with nothing but their own financial investing accumen to guide them into retirement security. Maybe you'd make out great, maybe not. If you were into investing, it might've looked like a great opportunity. But even then it was obvious that risk was being transfered from employers to employees, since many if not most employers had a contractual, and sometimes constitutional, obligation to provide a guaranteed retirement income based on job class and years of service. It probably worked out well for some with enough income to invest, but it was clear even to someone as oblivious as me (who didn't much care about financial matters or could even imagine retirement back then) that most people probably wouldn't have either the funds, insight, interest, or sophistication to manage all the various complexities involved in guiding and growing their own retirement accounts. And so it has come to pass. Read the comments for other perspectives.]
