$6.6 Trillion Retirement Savings Shortfall Shows 401(k)'s No Replacement for Pensions

Last week the Washington Post ran a story on the weaknesses of 401(k) retirement accounts, focusing on the the fact that 1/4 of Americans with 401(k)'s have used them to meet current income needs. Among people in their forties, the share rises to 1/3,  an astounding figure considering how close this group is to retirement. In the wake of the Great Recession and continuing job market problems, it is perhaps not surprising that 28% of 401(k) account holders presently have loans against their accounts.



As the Post delicately puts it,

Many employers have embraced 401(k) and other defined-contribution
accounts as a way of helping workers save for retirement while relieving
themselves of the financial risks that come with managing a traditional
pension plan. In theory, 401(k) accounts are better suited to an
economy in which workers are changing jobs more frequently than ever
because the accounts can be rolled over from previous employers.

A more accurate way of saying this would be that employers have embraced 401(k) plans because they are less expensive than providing pensions, thereby "cut(ting) overall employee compensation," and that 401(k) plans don't take into account the stagnation of real wages, points well made by commenter "Sean2020."



Moreover, as I reported before, 49% of private sector worker have neither a 401(k) or a defined benefit pension plan. Thus, they have no supplement to their eventual Social Security benefits unless they are able to save outside of a 401(k).



And they aren't saving. At least, they're aren't saving nearly enough to maintain their standard of living after retirement. As a report from the Senate's Health, Education, Labor, and Pension (HELP) committee states, there is a  $6.6 trillion gap (methodology here) between what people need to maintain their current standard of living and what they've actually saved for retirement. This is equal to the combined assets of defined benefit pensions and 401(k) type plans, more than total state/local/federal government retirement plans, and more than twice as much as the Social Security Trust Fund. There's a reason I've been using the word "crisis"!



Total Assets



Social Security Trust Fund      $2.7 trillion (12/31/2012)

Defined benefit pensions         $2.3 trillion (9/30/2012)

Defined contribution 401(k)    $4.3 trillion (9/30/2012)

State/local gov't employee      $3.1 trillion (9/30/2012)

Federal employee retirement  $1.5 trillion (9/30/2012)

IRA's                                    $4.9 trillion (6/30/2011)





Sources: Social Security Administration; Federal Reserve, tables L-116, L-117, and L-118 (financial assets only), for DB, DC, and government employee programs; Investment Company Institute for IRAs



This gigantic hole shows that the current model, based on 401(k)'s rather than true pensions, is not working. In a future post I will discuss ways to fix the crisis.