It’s in vogue to catastrophize about the state of retirement savings in the United States. Pundits and academics alike often cite average 401(k) account balances from surveys as evidence that the United States is facing a looming retirement savings crisis. Some even go even further and claim the 401(k) system itself is the sinister cause of this calamity.
Their reasoning usually goes something like this: Back in the good old days, workers were covered by defined benefit pension plans, which offer workers lifetime payments in retirement based on how long they worked for their employer and their salary when they leave.
Then in 1978 Congress created 401(k) accounts, in which workers accumulate retirement savings in personal accounts based on annual contributions and investment earnings. Since then, employers have moved away from traditional pensions in favor of 401(k)s, decimating worker retirement security.
It’s a compelling story, but it’s mostly wrong.
Yes, employers have shifted from offering defined benefit plans to offering defined contribution plans such as 401(k)s, and workers should probably be saving more for retirement. But the notion that the shift is causing a retirement crisis is hogwash.
Given the ubiquitous claims of a retirement crisis, we should expect to see big changes over time in retirement plan coverage, participation and savings. To qualify as a crisis, the situation today should be dramatically different than in past decades. But that’s not what the numbers show. Retirement plan participation and savings rates have been relatively stable over the past 40 years.
In 1979, nearly 40% of private-sector workers participated in a defined benefit plan, and fewer than 20% participated in a defined contribution plan, according to estimates by the Employee Benefit Research Institute. That same year, 45% of private-sector workers participated in at least one employer-provided retirement plan.
More than 30 years later, participation by plan type had shifted significantly. As of 2011, nearly 15% were enrolled in a defined benefit plan, and more than 40% were in a defined contribution plan. But the overall participation rates stayed the same at 45%. (Some employees were enrolled in both plans.)
The shift to defined contribution plans has not resulted in fewer workers participating in a retirement plan.
Even though there has not been a decline in retirement plan coverage or participation, the shift to defined contribution plans could lead to a reduction in retirement savings because workers and their employers could choose to save less each year than they would have under a defined benefit plan. However, Federal Reserve data show that total retirement savings (all money set aside for retirement in both defined benefit and defined contribution plans) relative to wages is at an all-time high, more than doubling since 1980.
What’s more, annual savings rates appear to be relatively constant over time, meaning people are saving about the same share of their income for retirement as they did in the past.
Many aspects of our retirement system need to improve, chief among them the large underfunding of Social Security and state and local pension systems.
Policymakers and other advocates should also find ways to help more people achieve a secure retirement by enhancing Social Security benefits for low-income workers, improving retirement plan coverage and savings rates, and increasing the availability of lifetime payment options in retirement.
Raising a furor over a nonexistent retirement crisis is diverting attention away from these and other important issues.
Josh B. McGee is a senior fellow at the Manhattan Institute and a member of the Texas Pension Review Board.