Senator Dean Heller (R-NV) had this to say during the Senate Banking Committee’s hearing on retirement security:
“A growing number today’s workers are preparing for retirement through defined contribution plans, like 401(k)s, and Individual Retirement Accounts (IRAs), that allow families to accumulate financial assets from investments in stocks, bonds and mutual funds. These retirement accounts, along with the development of rules allowing for increased after-tax contribution allowances in Roth plans, are further expanding individuals abilities to contribute earnings to their retirement plan. Although these are positive developments, many Americans are still struggling to save for retirement. Senator Dean Heller (R-NV) March 13, 2014”
True… sort of. Did we notice the part about “workers are preparing for retirement through defined contribution plans?” Senator Heller makes this sound like a ‘happy thing.’ In fact, there are some serious disadvantages to those defined contribution plans.
In a defined contribution retirement plan (1) the worker/investor takes all the risk; (2) unless the worker annualizes their account balance they can outlive their benefits; (3) benefits may not bear any relation to the working pay; (4) is more expensive to administer than a defined benefits plan; (5) outside service is not easily translated into a larger retirement account balance; (6) employees are not necessarily rewarded for continuing to work if the account balance is deemed sufficient or they want to transfer to a new employer’s program; (7) there is no post retirement benefit increase; (8) it is difficult to transfer a lump sum account into a steady monthly or annual income stream. [IllinoisMRF pdf]
In other words, for an employee to derive the full benefit from a defined contribution retirement plan that individual has to be a pretty savvy investor, and has to think of him or herself as a ‘non-career’ employee. There is also a bit of a calendar game going on. Imagine the difference between a person’s retirement investment portfolio if the person were to retire in the wake of the Mortgage Meltdown of 2008 when the market closed at a low of 6,594.44 on March 5, 2009, [USecon] and the individual who retired as of 3:00 pm yesterday afternoon when the DJIA was 16,075. [Money]
There’s nothing which seems particularly ‘positive’ about putting family retirement plans into the hand of the Wall Street Casino and hoping they accumulate — and peak at just the right time — unless some ickiness happens like fund managers investing in Enron, or Lehman Brothers, or… whatever.
Timing is crucial. If we look at the real world, and the reality of savings in America then the Work Until You Drop Rule could easily come into play:
“The reality is that many DC plan participants are unable to retire or must find a way to generate additional income because their investments failed to meet their needs. A recent study by Fidelity Investments revealed that workers 55 and older had an average 401(k) plan balance of $233,800 in 2011. If those investors retired and put all of their money into high-risk investments (the only way to generate decent returns), they might be able to generate 6% per year. That’s about $14,000 in income.” [Smith InVest]
To put this in perspective, 2014 federal poverty level guidelines put a two person family at 100% of the poverty level based on an income of $15,730, and that would be if they placed their money in high yield high risk investments.
However, Senator Heller is correct, there has been a shift into the defined contribution plans, as noted in EPI testimony to the panel:
“In the private sector, defined-benefit pensions were largely replaced by defined-contribution plans, shifting costs and risks from employers to individual workers. In 1989, 62 percent of full-time private-sector workers had retirement benefits and these were divided roughly equally between those with defined-benefit pensions and those with defined-contribution plans, including roughly 20 percent of full-time private-sector workers who had both. By 2010, 50 percent of these workers had a defined-contribution plan and 22 percent had a defined-benefit plan, including roughly 13 percent who had both (Wiatrowski 2011).” [EPI]
And here’s the part wherein the rubber of Republican theoretical and ideological rhetoric meets the road of reality:
“In theory, the shift from defined-benefit pensions to defined-contribution plans could have broadened access by making it easier for employers to offer retirement benefits. However, participation in employer-based plans, which peaked at just over half (52 percent) of prime-age wage and salary workers in 2000, fell to 44 percent in 2012. This occurred even though the baby boomers were entering their 50s and early 60s, when participation rates tend to be high (Copeland 2013; Morrissey and Sabadish 2013).” [EPI]
What is the result of this shift? Can we use the Inequality and Uncertainty tags?
“As 401(k)s replaced traditional pensions and the population aged, assets in individual and pooled retirement funds grew faster than income. By 2010, average savings in retirement accounts had surpassed the value of annual household income. However, retirement insecurity worsened as retirement wealth became more unequal and outcomes more uncertain (Morrissey and Sabadish 2013).” [EPI] (emphasis added)
Here’s what that looks like with real numbers:
Mean household savings in retirement accounts increased from around $24,000 in 1989 to around $86,000 in 2010. However, the growth was driven by a small number of households with large balances. Median savings—the savings of the typical household with a positive balance—peaked at around $47,000 in 2007 before declining to $44,000 in 2010 in the wake of the Great Recession, even as the baby boomers were entering their peak saving years (Morrissey and Sabadish 2013). [EPI] (emphasis added)
And about those ‘tax incentives’ to which Senator Heller refers as ‘positive developments’ — what of those?
“Retirement account savings are very unevenly distributed. In 2010, a household in the 90th percentile of the retirement savings distribution had nearly 100 times more retirement savings than the median (50th percentile) household, which had a negligible amount. The top 1 percent of households had over $1.3 million in retirement account savings. All told, households in the top fifth of the income distribution accounted for 72 percent of total savings in retirement accounts (Morrissey and Sabadish 2013). Assuming upper-income households receive tax subsidies at least proportional to their share of savings, this suggests that the lion’s share of tax subsidies for retirement savings go to high-income households.” [EPI] (emphasis added)
And so, in Heller’s Happy Land, the rich get richer and the “lion’s share of tax subsidies for retirement savings go to high income households.” There seems to be something of a theme going on here — Lion’s Shares and Subsidies for the Top 1% — the Republican Concern Core.
Meanwhile, the Wall Street sector enjoys a cut of the savings at every jog and turn. No wonder Senator Dean “Banker’s Boy” Heller is pleased with the trends?