A growing cadre of experts is declaring do-it-yourself retirement saving a failed experiment. The era that began in the 1970s with the introduction of 401(k) plans has resulted in a generation that, for the most part, has neither pensions nor savings anywhere near adequate to fund retirement. What has worked and continues to work is Social Security, and an expansion, addition or introduction of new programs similar to that one is the answer, these experts say.
One such retirement authority is Teresa Ghilarducci, a labor economist and pension fund trustee. "We are headed for a retirement crisis where tens of millions of people who were middle class as workers will be poor or near-poor adults," Ghilarducci says. "The employer-provided tier of pension support has devolved into 401(K) type accounts that earn a low rate of return, because the fees are too high, people don't save enough and they are paid out as lump sums that the market can't turn into an annuity in any reasonable way."
To repair this situation, Ghilarducci in 2007 proposed a program called the Guaranteed Retirement Account or GRA. "A GRA is an add-on account to Social Security," she explains. "You contribute to it your entire work life; it is invested in an account that will earn 5% to 6%, with a guarantee of 2%, and at the end of your working life, you will be able to withdraw it as an addition to Social Security."
The GRA proposal would require every worker to pay 2.5% into a federally- sponsored fund. Employers would contribute another 2.5% of the worker's earnings. The result would be invested conservatively by private managers picked by the government with the objective of providing at least that guaranteed minimum annual return.
Unlike the IRAs and 401(k) plans, workers would not be able to tap the funds before retirement age except in special cases such as disability. If the saver dies before reaching retirement, survivors could get the benefits.
Once a worker reaches minimum Social Security retirement age, currently age 62, the worker can start making withdrawals. Again, unlike DIY retirement plans like IRAs and 401(k)s, you couldn't take all the money as a lump sum. Instead benefits would be paid in monthly installments for as long as you live, similar to an annuity or pension. Savers could take a small part as a lump sum, in exchange for smaller monthly payments.
GRA is seen as a supplement to Social Security that, in combination, would fix Americans' inability to save adequately for retirement. Right now, workers contribute current 6.4% of earnings to Social Security and employers match that for a total of 12.8%. Adding 5% in GRA contributions comes to 17.8%. That is within the range of 15% to 20% of earnings considered necessary to save in order to be able to replace 70% or so of pre-retirement income, which is a widely accepted standard for a financially secure retirement.
While some on Wall Street like the idea, not everyone in the retirement business does. Mike Foguth, founder of Foguth Financial in Howell, Mich., is not a fan. "To put it bluntly, I think it's a bad idea," Foguth says. "It's a bad idea, because everybody's just so different about what they're looking for."
Foguth says, for instance, that a saver whose family medical history suggested a shorter-than-usual lifespan might want to spend faster in retirement than a GRA would allow. Other savers may want to save more than 5%, or divert savings to education or to leave an inheritance. "People want to spend their money differently," Foguth says, and requiring everyone to contribute to a GRA would make that difficult or impossible.
Ghilarducci says the GRA is not a one-size-fits-all solution, however. "It only has minimum contribution requirements so people can save more," Ghilarducci says. "And there are plenty of places people can accumulate wealth for their kids' inheritances." The program is intended to meet retirement needs, she notes, not solve all financial problems.
Proposals for GRA-like programs have been made in Washington, D.C., without success. That hasn’t stopped some states, notably California, from taking steps to set up their own programs to provide GRA-style retirement for workers. And similar programs already operate in other countries as well as in the US in the form of corporate and other private-sector pensions.
As more people retire without adequate financial resources and the scope of the problem becomes more apparent, proponents of programs similar to the GRA anticipate their proposals will receive more attention. That could be soon.
A report by the non-profit Washington-based National Institute on Retirement Security recently calculated the national retirement savings deficit at between $6.8 trillion and $14 trillion. The median retirement account balance, according to the report, is $3,000 for all working-age households and $12,000 for near-retirement households. "The average working household has virtually no retirement savings," the report said.