Life Lines

A couple of weeks ago, I stumbled across a paper published by the National Bureau of Economic Research titled “New Estimates of the Future Path of 401(K) Assets.” In this particular case, “new” appeared to relate to the paper, not the future path of 401(k) assets. Bottom line: 401(k) assets are going to keep growing, and at a better rate over the next couple of decades than they have the past 20 years (there was also a brief article on this paper in the New York Times last week, which you also may have seen syndicated locally). In fact, the paper notes enthusiastically, “We conclude that the increase in the pension assets of future retirees will be much greater than the assets of current retirees.”

This is good news, of course, since such programs seem destined to represent the primary retirement savings in the decades to come. We need them to grow, and we need them to grow faster than they have heretofore, certainly based on the average and, more significantly, median account balances reported from various sources.

Projections of the future are, inevitably, based on understandings and extrapolations of the past, and this paper is no exception. The paper’s authors remind us that 401(k)s are a relatively recent “invention,” with contributions to them beginning only in 1982. Thus, the argument goes, the balances in today’s retiree accounts have not had as long to accumulate as will those who retire 40 years hence. Moreover, they compare data from 1984 with that in 2003 that illustrates a large increase both in the number of workers eligible for a 401(k), and in those actually choosing to participate. In essence, today’s retiree balances have suffered from both a late, and a slow, start relative to the retirees of the future. And, since the retirees of 40 years hence will have had “full” access to the benefits of saving (and investing) via a 401(k) for their entire working lives, they will wind up with more—significantly more—In the way of savings accumulations than their parents.

None of this is particularly controversial logic, though it seems to me that it ignores another reality—that defined contribution savings programs existed well before the advent of 401(k)s. As a mid-range Boomer, I was saving in my employer’s “thrift incentive plan” for the “free money” from a match just as soon as they would let me (waiting a year to be eligible was normal in those days). My savings weren’t pre-tax then, of course (1979)—but the earnings and company match were.

Now, it is entirely possible that the advantages of pre-tax savings drew the attention of workers in the 1980s who had not previously taken advantage of various “thrift” plan alternatives—programs that were (including stock bonus and profit-sharing), in large part, subsumed (in name, anyway) into the newer 401(k). It is equally possible that the nation’s economic resurgence in the 1980s led employers to offer 401(k)s that had not previously offered a defined contribution plan, or that the tightening labor market of the 1990s compelled employers to offer new programs as a competitive advantage. Furthermore, there seems little doubt that the decline in coverage and availability of traditional pensions, and the widespread media coverage of same, has more recently led some to contribute to their own retirement security in amounts they might not otherwise.

Still, while we certainly have more ways to save today, ways that are generally “better” and more “convenient” (don’t even have to fill out an enrollment form these days) than they were 20 years ago, the savings rates I hear reported for younger workers today strike me as remarkably consistent with those of the past. IMHO, choosing to save for retirement, or for any purpose, is—and always has been—about balancing current economic realities with long-term goals. Generally speaking, the former looms larger the younger—and poorer—you are.

There’s little question that the 401(k) has attained a certain ubiquity (though it’s worth remembering that most American workers aren’t covered by a workplace retirement plan). But we shouldn’t assume that just because more workers have an earlier ability to participate in a 401(k) plan—and for their entire working lives—that they will do so. We—and they—can’t afford to.

- Nevin E. Adams, J.D.

The research paper is online at http://papers.nber.org/papers/w13083.pdf