Pensions 2.0: A Better Plan for a Financially Secure Retirement?

President Obama's focus on healthcare is essential; next his focus must be retirement security.

Even before the economy's free fall and the elimination of many employer matches to 401(k) plans, our retirement system wasn't working for most Americans. Only half of full-time workers have retirement plans through their employers and the number is far less for part-time workers.

Among those workers who do have 401(k) plans, the vast majority have far too little in their plans to retire with adequate income. The median 401(k) account balance was only $25,000 in 2006, and only $40,000 for workers approaching retirement. And those small amounts have decreased as 401(k) plans have lost 30% of their value on average due to the plummeting of stock market prices.

With their pensions disappearing and their savings minimal, most Americans can only be sure of receiving Social Security income once they retire. Social Security wasn't designed to be retirees' sole support, and few would find it enough to live on. The United States deliberately created the Social Security system during the Great Depression to provide only a bare-bones uplift from dire poverty for our elders, envisioning a hybrid public/private system of retirement security. By the 1950s, most people assumed that personal savings and employer pensions would be available to supplement their Social Security checks.

Yet today, Social Security is the sole source of income for 1 in 4 recipients. Of those receiving Social Security, nearly 2 in 5 (39 percent) rely on it for 90 percent of their retirement income. As the dollars in 401(k) plans dwindle, people will increasingly be forced to depend on only Social Security.

Yet, the average annual Social Security benefit in 2008 was only around $13,800. For low-wage workers, the situation is even worse. Even with Supplemental Security Income, which provides additional money to workers over 65 with the greatest need, low-wage workers will receive something closer to $7000 to $8000 a year to live on in their so-called golden years.

As millions of boomers retire each month, we need to change the current system quickly if we are to preserve the American promise of a dignified retirement for all. Social Security can and should be strengthened and improved to fulfill its promise, especially for low and middle income workers. It is an efficient vehicle for providing guaranteed benefits to retirees of every income level and could, once fixed, ensure that virtually all American workers have some basic income when they retire. Social Security is also consistent with the needs of contemporary workers who are more defined by job-changing than by remaining in the same job for one's whole life.

Private pensions have been an integral part of our retirement system. We are now seeing clearly that the system of voluntarily saving for retirement isn't working. Our retirement system has been likened to a three-legged stool: Social Security, employer provided pensions and savings. Two legs of the stool have collapsed.

Pensions have been decimated and savings are scarce if any. Real estate, one popular way of saving for many U.S. families, has recently caved in the economic crisis and is no longer a reliable source of savings for the aging Boomer generation. If we want to ensure that Americans have the necessary income to retire with basic dignity, we must act to reform the retirement system.

First, we must strengthen and support Social Security. But we need more. We must also build a comprehensive private retirement system that combines the most effective components of defined benefit plans with the portability and simplicity of 401(k)s. We need a system that provides guaranteed payments that don't run out while we still need them.

Unless we bolster Social Security and fix the private system for helping Americans save for retirement, workers of today face a very dark financial future in what used to be called the golden years.

Beth Shulman is a Work & Economy Analyst for the Russell Sage Foundation.