As an advocate for 401(k) participants, I've found that the only thing more frustrating that the media's cluelessness about America's retirement crisis are the academics who not only don't understand we have one, but who happen to be among the few Americans who can afford to retire.
For example, University of Texas economist James Galbraith recently told The Huffington Post's Dan Froomkin that we should boost employment by lowering Social Security's normal retirement age so that Boomers can retire and younger people will be able to fill their jobs.
But if most Americans only need Social Security payments for their retirement, why the heck would we need pensions? The purpose of Social Security is to replace the wages of the poorest 40% of us who don't have pensions. Unfortunately for the middle class and upper-middle class, only 10% of the private sector can count on a pension and the 401(k) plan's measly employer contribution rate of 3% of pay makes it a "pretend pension." What's even worse, 50% of the private sector population isn't covered by a pension or a 401(k) plan.
Whether it's a private sector plan or Social Security or a combination of both, the goal for most of us is to have at least 70% of our paychecks replaced at retirement. So if you're making $20,000 at age 65 and retire at 66, Social Security will do just fine, coughing up about 67% of your paycheck, or about $14,000 a year. However, if you're earning $102,000 you would only receive around $28,000, or about 27% of it. As I pointed out in an earlier post, if the median amount that American workers near retirement have saved in their 401(k) accounts is a mere $77,000 and their median salary is $61,000 their savings won't last them more than a few years.
Galbraith isn't the only academic weighing in on retirement issues who doesn't seem to know the rules for adequacy. As I pointed out in my book America, Welcome to the Poorhouse, Theresa Ghilarducci of the New School of Research has proposed replacing the 3% 401(k) employer matching contributions with an annual measly government deposit of $600 even though this would shrink the nest eggs of anybody earning $20,000 or more. Another academic, Alicia Munnell of the Center for Retirement Research at Boston College, says that "in theory workers could accumulate substantial wealth" by contributing 6% of pay and ending up with $380,000, which only works if you're making $38,000 at age 65, since the formula for adequacy is accumulating 10 times your salary.
Ironically, these three academics can retire because their employers contribute at least twice as much to their version of a 401(k) account. For example, Munnell's employer contributes 8% of pay for those with fewer than 9 years of service and 10% for those with more, Ghilarducci's contributes 7% for those with fewer than six years and 10% for those with more and Galbraith's contributes 6% and certain staff can get an additional 7.5% contribution. In fact, most universities have offered generous plans since the 1940s when the increase in college enrollments thanks to the GI bill increased the demand for professors, who in turn demanded better compensation.
Do you think that you may be one of the few people who have saved enough to support yourself in retirement? The only website I know that helps you figure this out is run by a retired pension actuary, Ken Steiner. Here's a link to his website where you can find out whether you're on track. Go to the "spending calculator" link below the headline "Self-insuring your retirement."
Unfortunately, most employers outside of academia not only don't contribute enough so that we can retire -- not to mention "suspending" contributions to our accounts when times are tough -- but aren't required to tell us that our nest eggs aren't adequate. With the first wave of Boomers turning 65 next year, we are looking at a retirement nightmare. If you agree and think we need reform, please go to my website and click the link on the upper right hand side of the page: Stop the 401(k) Nightmare. I thank you and our kids thank you.