401(k)s Are Failing Americans.
Though they save employers money, 401(k)s leave workers unable to retire.
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In my experience, the trope of “personal responsibility” is the most common defense used to shield capitalism from criticism. Whenever someone points out the inequality present in the capitalist system, those who like capitalism are quick to shift blame from the system to the working class. As their defense goes, it isn’t our system that needs changing, but rather the attitude of average Americans. For example, in the video below, billionaire Mark Cuban tells his followers to save money instead of buying "an extra latte."
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This idea that it is the people who need changing isn’t limited to TikTok videos and snarky debate comments. It has steered American society for the worse. One way in which the mantra “personal responsibility” has hurt us is in how Americans save for retirement. With Social Security under constant political attack and pensions all but extinct from the modern workplace, the 401(k) has become the go-to way in which Americans save for retirement.
Unfortunately, as the data shows, 401(k)s are not up to the task. While they cost employers less, 401(k)s leave elderly Americans with insufficient funds, often forcing them back into the workforce.
The Start of 401(k)s
Surprisingly, 401(k)s were created by somewhat of an accident. Hidden in the Revenue Act of 1978 was a clause stating employees could defer wages until they retired, with no taxes paid until then. A few years later, the IRS clarified employees could defer standard wages, not just bonuses, and the 401(k) was born. Immediately, their popularity soared. There were approximately 30,000 401(k) plans in 1985 and over 200,000 by 1995.
While 401(k)s were never designed to be America’s primary retirement system, employers soon began pushing them to be. Companies found defined contribution plans (another name for 401(k)s) were cheaper than defined benefit plans (pensions), so they stopped offering pensions in favor of 401(k)s. In 1985, when there were 30,000 401(k) plans in existence, there were approximately 170,000 pension plans. Twenty years later, these figures had crossed each other. By 2005 there were just 41,000 pension plans while the number of 401(k)s had jumped to 417,000. As you can see from the graph below, this trend continues today.
As the name implies, a defined benefit plan (pension) pays a retiree a certain amount of money each year. This is different from a 401(k), in which the retiree has a set amount of money that has to last them the rest of their life.
Like many aspects of American culture, the shift from pensions to 401(k)s came wrapped in the language of “personal responsibility.” Where pensions made companies responsible for ensuring workers could retire, the 401(k) moved that burden onto the worker. After this shift, it was now the individual’s job to ensure they had enough saved for retirement, which was an impossible task.
The Result
Currently, there are about 60 million Americans with a 401(k) plan, or about 17.63% of the population. Not only is the percentage of Americans with a 401(k) remarkably low, but those with 401ks don't have enough in them. According to Empower, the median 401(k) balance held by Americans aged 60 to 65 is a meager $53,300. Within five years (presumably, once these Americans retire and start living off of their 401(k)s), the median balance has fallen to $43,152, a 20% decrease.
This measly $53,300 is nowhere near enough to support Americans through retirement. While the exact amount of money someone needs to retire varies, almost everyone agrees it’s a substantial figure. A recent survey of 1,000 Americans found most believe they’ll need at least $1.8 million to retire.
According to Bank of America, 64-year-old Americans will need 9.2 times their annual salary in savings if they wish to retire the following year. Data from the Bureau of Labor Statistics shows the typical American 64-year-old male earns $1,134 a week, or $58,968 a year. This has Bank of America estimating most Americans will need $542,505.60 to retire. That’s significantly lower than the $1.8 million estimated in the survey, but still over 10 times what the median American has saved in their 401(k).
Whether we use the conservative Bank of America estimate or the estimate of surveyed Americans, we reach the same conclusion: 401(k)s are not enough to support Americans through retirement. Without the resources needed to retire, many Americans must work long past age 65. As of 2022, 26.6% of Americans over 65 were still in the workforce, as were 8.2% of Americans over 75. These numbers are forecast to rise to 29.9% and 9.9% by 2032, showing the increasing harm done by the disappearance of pensions and their replacement by 401(k)s.
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The Solution
So, if 401(k)s are unable to support retired Americans, what should the solution be?
Back in 1985, retired workers who had made $15k annually before retiring would get approximately a year's salary ($14,172) from their employer-funded pensions. $14,172 equates to $40,262.57 in 2023 dollars, which is about $3,000 less than the amount in today’s median 401(k) for Americans aged 65 to 70. So, while in 1985 pensions gave retired workers approximately one year's salary every year (it was less for higher-paid workers), the retirees of today have to support themselves on an equal amount for the rest of their lives.
Clearly, the current model of “personal responsibility” isn’t working. 401(k)s should cease being the primary method of retirement savings, and labor advocates should strive to bring pensions back into the mainstream.
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So, the 401k equivalent for non-profit workers is the 403b. Non-profit workers are typically paid a pittance for doing “god’s work” (I’m an atheist, so that why the quotes, but for real: non-profit staff bust their asses holding up the most vulnerable in our society in most cases. Like teachers and nurses, they should get the respect and the pay that is commensurate with their value. Off soapbox!). Many don’t even participate in their organization’s 403b plan because they are living on razor thin margins and don’t see the value in investing even $5 or $10 a paycheck. At my last agency (I was an exec), we grappled with whether to make our 403b an automatic enrollment plan from a person’s hire date as opposed to having staff opt-in, which typically lead to low enrollment. We instituted a matching contribution, and we didn’t want staff to lose out on that free money, but we weren’t sure if forcing enrollment was paternalistic (staff automatically enrolled could later opt-out if the chose to).
My whole point is it would be interesting and probably gut-wrenching to do a similar piece on what the median 403b account has in it at retirement age. So many of these staff truly can never retire. It’s heartbreaking.
I love you were able to get this great Empower data! And how you perfectly explained the concept of median vs. average.
I'm a fan of Cuban so I'll just say, I think some mix of paternalism and "personal responsibility" is best. I did read in a separate article that among "millionaires next door," in the top five occupations were teachers, who have super powerful unions and excellent pensions. I forget the exact figure but in the same article, it also said a substantial percentage of these millionaires next door never made a 6-figure annual salary in their entire careers.
So this is leading me to believe, it's a blend of government policies plus good old fashioned living within one's means and having some financial literacy, that could have the best chance of succeeding.
P.S. TY for the school supplies especially the two ✏️✏️! I let my kid have one cuz she just loved the message printed on them and so do I (Not gonna spill what it says, so peeps have to be a paid subscriber to find out 😉)