What Happened to the Three-Legged Stool?

 Once upon a time, we talked about retirement as having three legs [i]: Social Security, workplace savings/pensions, and personal savings. But to a number of vocal pundits, the full burden has been put …on the 401(k).

But before there was a 401(k)—and even before the advent of ERISA—there was Social Security, a program designed to provide retirement income to working Americans. It remains absolutely integral to even the most rudimentary retirement planning calculation, and with good reason. 

That said, despite a looming financing shortfall—and a fairly widespread notion that those benefits aren't "enough" for a full retirement income replacement, you don't see headlines in the New York Times—or folks going on book tours—proclaiming that program was a "mistake" the way some do about the 401(k). 

The reality is that Social Security­—like the 401(k)—has undergone significant changes in scope, funding, and mission since its 1935 inception.

People are often confused as to the relationship between what they put into it and what they'll receive in benefits (it's a loose connection, at best), but—despite a couple of close calls over the decades, those checks that millions of Americans rely on for a majority of their post-retirement income (at least according to Social Security) have kept coming. 

That said, everyone seems to blithely assume that at some point, some way, someone (else?) will remedy the looming funding issue (if only to have it be another draw on the U.S. Treasury). But a mistake? 

No, despite those funding struggles (even though it's a pretty hefty—and mandatory—reduction of both individual paychecks and that of their employer) —there are (to my ears) no real threats to replace it, no actual condemnation of the mechanics that created the current situation—and nobody calls it a "mistake."

And no wonder—by all accounts, even in its current form, Social Security does a pretty solid job of replacing pre-retirement income levels for lower-income individuals. It might not be a luxurious retirement for them, but it seems to be doing what it was designed to do—even though that design has been allowed to morph/expand over the years to provide more benefits to more individuals. 

Indeed, most recent calls for a defined benefit plan "comeback" seem oblivious to the fact that Social Security provides exactly that type of benefit, adjusted for the cost of living, and not just for the lowest incomes.

So, what about the other two legs of that three-legged stool?

Well, personal savings has always been a challenge for American workers—and for many, the opportunity to save through payroll deduction at work has become their personal savings as well. There's a hazard in that reliance, of course—but many are likely saving more (and, thanks to the company match, gaining more) than they might otherwise.    

As for that third leg, the reality is that the 401(k) actually does a pretty good job of what workplace savings was always designed to do—supplement the foundation that Social Security provides—and yes, even for lower-income individuals. 

It has been—and continues to be—an essential element of retirement security for middle-income workers, for whom Social Security benefits alone likely fall short of their pre-retirement income levels and needs. 

Those of us who help people plan and save for retirement every day know that the 401(k) is, and remains an essential element of retirement security for most American workers.

Yet certain pundits—who seem to have no problem being handed a microphone (even by those who should know better)—continue to dismiss it as a "mistake." 

So, what happened to the three-legged stool? 

It's still very much with us—and we're all better off when we have access and opportunity to lean on them.

The 401(k) alone was never designed to be "enough." While its critical role in retirement security may well have been an accident, it's surely no mistake—and where would we be today without it?

 - Nevin E. Adams, JD

[i] According to Social Security, "the earliest use of this metaphor which we have been able to document was by Reinhard A. Hohaus, an actuary for the Metropolitan Life Insurance Company. Mr. Hohaus, an important private-sector authority on Social Security, used the image in a 1949 speech at a forum on Social Security sponsored by the Ohio Chamber of Commerce. Hohaus, however, had a slightly different "stool" in mind than came to be understood in later years. His three-legged stool consisted of private insurance, group insurance, and Social Security."


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