As the Baby Boomers enter retirement in larger numbers, it's becoming clear that America's current retirement system is inadequate. Fidelity estimates that the average 401k balance for over 55's was a mere $150 000, or enough to generate $500/month in retirement.
As we've shifted from defined benefit to defined contribution retirement plans, workers have fallen behind. This is not solely due to poor investment returns. A 60/40 portfolio today is worth more in real terms than it's 2007-2008 peak. Workers have fallen behind due to poor savings rates, high fund fees, and chasing returns.
While wages have fallen in many cases, I'm not confident that people would save enough even if they were rapidly rising. Lack of savings is a problem for most classes, even the well-off. However, going back to defined benefit plans wouldn't make sense. People change jobs more and many poorer people have spotty work histories.
The tax shelters like IRA's/401k's should be kept in place for those who are disciplined enough to save and invest prudently, but for most people, another solution is needed. Most people are too undisciplined or simply don't make enough to save for retirement.
That is why I propose the following solution
- Introduce a guaranteed minimum income for seniors. It should be enough to sustain a modest standard of living
- Turn Social Security into a proper pension plan by allowing it to invest in riskier assets
- Allow employers to use Social Security as their pension plan (I.e. Your employer can contribute additional money to Social Security as a benefit)
- Allow people to purchase additional Social Security benefits with their savings
- Raise premiums as needed to reduce Social Security's deficit
- Retain tax shelters like the 401k, and IRA for those who wish to save more money or beat the market
This would prevent less investment savvy workers from squandering their savings, while allowing more flexibility as the economy changes. The minimum income would also insure that those who didn't work don't starve.
The main issue I can see with this plan is that you'd have to make sure that the politicians can't get their paws on the plan. For example: allowing people to purchase more Social Security at actuarily unsound prices would be disastrous. However, assuming everything is kept at arm's length, it should work out reasonably well.
Thoughts?
