Critiquing the Retirement ‘Crisis’

 It’s been said that a crisis is a terrible thing to waste. But what if it’s a figment of your imagination?

“Crisis” is a word much bandied about these days, most particularly as a label applied to retirement—by foes and fans alike. Indeed, while not so long ago headlines posed that premise as a question (“Is there a retirement crisis?”), it is now generally posited as a current reality (often accompanied by an exclamation point)—even though an examination of objective data (and a clinical application of the term “crisis”[i]) suggests otherwise.

To a certain extent, such hyperbole is understandable; “crisis” is, after all, one of those descriptors that cry out for swift and decisive action—and the industry of employee benefits has had its fair share. Let's be honest - claiming that we are in the middle of a crisis is most assuredly a better bet in terms of getting a book deal, a televised interview, or hundreds of thousands of “clicks.”

And certainly over the course of my career, any number of leading retirement “industry” voices have referred to the “retirement crisis” as a motivation not only to get about the business of helping more working Americans prepare for retirement, including the encouragement of employers to not only offer access to retirement plan benefits, but to include design features, such as automatic enrollment and qualified default investment alternatives (QDIA), as well as to foster greater and more effective utilization of those benefits. 

More recently that same label has been used by critics of the 401(k) system (and private sector retirement plans generally) to further their claims that the system is “broken,” that it disproportionately benefits the wealthy, and that the incentives tied to the deferral of income have no real impact on the decision to save—claims all-too-unfortunately given credence every time someone in this industry uses the term “retirement crisis” as a current reality.

But is there really a retirement “crisis”? By any number of objective measures, the answer is “no,” or at least “not yet.” Doubtless there are some heading into precarious financial waters—though most were in those waters prior to retirement as well (trust me, if your financial circumstances ahead of retirement weren’t good, there’s nothing about retirement likely to cure that predicament). That said, actual data from real tax returns suggests that those in retirement are faring pretty well, certainly compared with pre-retirement. Moreover, those actually living in retirement seem more confident about their continued prospects than those viewing it from the pre-retirement perspective. 

Yet, we are surrounded by headlines that tout “averages” or even median savings levels that belie the reality that the age, tenure and costs of living vary widely, often dramatically among those responding to those surveys. We are bombarded by reports that dramatize notions of retirement confidence—or retirement “magic” numbers—generally taken among individuals who have never stopped long enough to do even a single approximation of what resources would be required tell us nothing (though they do seem to generate “clicks” and fan the fears of the equally uninformed). Ditto academic papers that imbed assumptions that are used to extrapolate results that are then absorbed and imbedded by other academic papers to further extrapolate results. Garbage in, after all… and then we apply the “magic” of compounding. 

However “accidental” its origins, in the space of just a few decades the 401(k) has become America’s retirement savings plan—in a way that the traditional defined benefit pension plan never really did (at least not in the private sector). That said, the past several years have seen dramatic improvements in access, efficacy, and participation in these programs—and that has not been an accident. The retirement system’s traditional three-legged stool has certainly undergone some needed rebalancing over time—and let’s face it, there may once have been three-legs to that stool, but they were NEVER equal.

Those who denigrate or deny the success of the 401(k) typically exaggerate its value to higher-income workers (though their inclusion fosters designs like employer matching contributions, not to mention the very existence of such programs) and at the same time gloss over the strikingly high participation rate of even modest-income workers. Perhaps more significantly, they myopically overlook its enormous value to the middle class—who stand to have less proportionate income replacement from Social Security.

Yes, despite evidence to the contrary, and for reasons I still can’t fully comprehend, there remain critics who seem bound and determined to “throw away” the 401(k).

Though it seems to me that would be throwing the baby out with the bathwater…

 

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[i] A review of the dictionary definition of crisis reveals the following perspectives: “A crucial or decisive point or situation; a turning point”; an “unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change”; a “sudden change in the course of a disease or fever, toward either improvement or deterioration.”