For decades, millions of workers were able to achieve retirement security because their retirement income was provided by a combination of Social Security benefits, employer-provided pensions and personal savings.  But, the current economic downturn has exposed the severe deficiencies in our nation’s retirement system.

The majority of American workers now face retirement with far less security than previous generations.  Indeed, only 16 percent of today’s workers—one of the lowest levels in 16 years—say they are very confident they will have enough money for a comfortable retirement according to the most recent Retirement Confidence Survey from the Employee Benefit Research Institute.

Defined benefit pension plans remain the soundest and most cost-effective vehicles for building and safeguarding retirement income security, with professional asset managers, lower investment fees and better returns.  Yet, only 21 percent of today’s private sector workers are covered by these plans and that number is decreasing as employers have walked away from their responsibility for the retirement security of their employees.  Changes in funding rules and new accounting standards contribute to an environment in which even healthy companies choose to freeze their pension plans or close them to new hires.

Almost four times as many state and local government workers—79 percent--have defined benefit pension plan coverage.  Their plans are also under attack through legislation and ballot initiatives to replace them with defined contribution plans, increase employee contributions or reduce benefits and COLAs for participants.

 The Inadequacy of 401(k) Savings Plans

 The number of 401(k) savings plans in the private sector has exploded as many employers shift responsibility for funding retirement to working families.  Just twenty years ago, there were only 83,300 of these savings plans covering less than 20,000 participants.  By 2007, the number of 401(k) plans grew to just under 491,000, an increase of almost 600 percent, while the number of covered workers tripled.

With 401(k) plans, individual workers decide how much of their wages to contribute and how to invest those contributions.  Yet for most workers with stagnant incomes, it is difficult or impossible to save.  Employers may provide matching contributions for those workers able to save.  But, nearly 20 percent of employers reduced or suspended these contributions after the onset of the recession according to a recent survey and only about half of those employers have resumed those contributions. 

The bottom line is 401(k) savings plans cannot compensate for the loss of a guaranteed lifetime benefit.  Even before the collapse of the stock market in 2008, half of all American families had no retirement savings.  Among families closest to retirement, nearly two in five had no retirement savings.  For those workers able to save, their account balances plummeted.  Assets in retirement savings accounts (both 401(k) plans and individual retirement accounts) dropped by 32 percent—from $8.7 trillion to $5.9 trillion in the first quarter of 2009.  While balances grew between 2009 and 2010, they are still more than $1 trillion below their peak in 2007.

The last two years illustrate the fundamental weakness and unreliability of 410(k) savings accounts as a primary source of retirement income.  Workers bear all the financial risk and responsibility.  They also bear the risk of longevity—the possibility of outliving their savings.  Tinkering with 401(k) plans by adding new features such as automatic enrollment or requiring companies without retirement plans to let workers contribute to an IRA by paycheck deduction will not bring about necessary change.  A retirement system based on individual accounts simply cannot meet workers’ need for lifetime retirement income that is adequate and secure.  

Building for the Future

 To address our growing retirement security deficit, we need to

• Strengthen Social Security and ensure that these benefits are adequate
• Strengthen and preserve existing defined benefit pension plans
• Develop a new system to provide universal, secure and adequate income for future   generations.

The Principles for a New Retirement System adopted by Retirement USA will guide the development of a retirement security system that draws on the best features of defined benefit and defined contribution plans and is built on the key principle of shared responsibility.  Everyone must participate and contribute--employers, workers and the government.