retirement

Mending the cracked nest egg

Work longer! 
In fact, Americans should work longer, advised Alicia Munnell, director of the Center for Retirement Research at Boston College, at the hearing.

"Older workers, whose 401(k) balances have been decimated by the financial crisis, have three options: They can save more, they can live on less in retirement or they can work longer. Saving enough to offset the impact of the financial collapse is virtually impossible," she testified. (As an example, someone with eight years to retirement who had been on track to replace 50 percent of his income in retirement would have to increase his savings rate from 6 percent to 21 percent to compensate for the market drop.)

"Reducing an already modest retirement income further is undesirable. So the only real option is to keep working," she said.

Among other things, working longer enables workers to:
  • Increase current income.
  • Get a bigger Social Security check if they delay enrollment.
  • Contribute longer to a retirement plan.
  • Shorten the period of retirement.

That last point kills me.

Munnell also advocates "a new tier of retirement income" that would replace 20 percent of a worker's pre-retirement income. She suggests a setup something like the Federal Thrift Savings Plan (the savings plan of federal workers), stocked with "sensible target date funds" that workers could not access and that should be paid out as annuities at retirement.

A social system 
Dean Baker, co-director of the Center for Economic and Policy Research, offered a solution with guarantees for those who sign up.

To supplement the meager savings of workers, Baker advocates a voluntary government-run pension system that would provide a modest guaranteed rate of return. Workers could opt to invest 3 percent or a modest amount of money, say, $1,000 or $2,000 a year, into this plan. At retirement, they would get regular payouts. The guaranteed return would be like that of a conservatively invested portfolio.

The government would assume market risk and perhaps be called upon to protect the funds as it did when it guaranteed money market funds. And this wouldn't cost taxpayers anything, he said.

His plan would make a difference in workers' retirement security. "For example, at a 3 percent rate of return, a worker who saved $1,000 a year for 35 years would be able to get an annuity of $4,200 a year at age 65."

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Hmm. That's better than nothing, but just barely enough to pay for some corn and bales of hay and possibly the odd apple to enjoy on holidays.

New and improved capitalism 
Paul Schott Stevens, president and CEO of the Investment Company Institute, presented solutions designed to protect the system as it currently exists -- but with enhancements. You might expect him to do this, since the ICI is an industry trade group with a membership composed primarily of investment management firms that have a vested interest in increasing -- not losing -- market share.

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