Fixing the Real Retirement Problem

I truly believe that, despite press reports to the contrary, we don't have a Social Security problem in America: We have a retirement problem.

And because I want to ensure that we produce the right retirement outcome for most Americans – not just the wealthy – I’m calling on our leaders to recognize and elevate this problem AND take steps to address it. I don’t claim to have all the answers, but I believe compelling everyone to save more and save smarter has to be part of the solution.

First, the facts: We're living longer -- the average 65-year-old has nearly two decades of life ahead, and one in every four will live past 90 -- but producing fewer workers. That combination is producing a big bill for longer retirements that we're already struggling to pay.

Meanwhile, we’re asking Social Security to be the primary source of income in retirement for too many people when in fact it was always intended to be part of a three-legged stool that includes private pensions and savings. But more than one-third of retirees are getting 90% or more of their income from Social Security.

Why? Traditional (defined benefit) pensions are disappearing. Only about half of private-sector workers are covered by an employer-sponsored plan of any kind – even 401(k)s. And, according to the Employee Benefit Research Institute, only two thirds of workers have saved anything for retirement – the majority less than $25,000.

Even those investors who can and are saving are tripped up by the now indisputable patterns observed in the field of behavioral psychology: Because they are more fearful of losses than enthusiastic about gains, they put too much of their savings in low-yielding securities or other investments and -- as the flight caused by the recent volatility in fixed-income markets demonstrates --continually make that most basic mistake: buying high and selling low.

So, to recap: We depend too much on Social Security, private pensions are less available, too few workers have 401(k)s, and Americans aren't saving enough or appropriately for retirement.

What can we do?

We need to make the retirement crisis our No. 1 national priority -- and pursue a comprehensive solution that allows people at all income levels to benefit from being investors.

Instituting default enrollments into 401(k)s was a good first step. We should also consider adjustments to the cost-of-living formulas embedded in Social Security to help restore that program to health.

But I believe we need to do more: We need a savings program, probably a mandatory one, to supplement Social Security's basic protections.

Let’s look at some additional math to bring home the point: Someone retiring at 65 today who made the maximum contributions to Social Security will collect annual benefits of only about $28,500 a year. And to produce even that amount, that retirement saver and her employer had to contribute more than 12% of eligible yearly income to the Social Security trust fund every year.

Now assume that same amount of eligible income had been invested in a diversified portfolio of 90% U.S. stocks and 10% U.S. bonds when the worker was 30, gradually adjusting to a more conservative 60/40 mix as retirement approached. The actual retirement income after 35 years would be around $42,000, considerably more.

To be sure, part of that return difference reflects Social Security’s disability and survivor benefits, which are protections that need to be preserved. But the far greater share is a benefit of better investment.

Bottom line: More savings invested in a diversified investment portfolio stands a better chance of producing a better outcome – an outcome all Americans deserve.