Private sector pension shortfall an epidemic for workers

Without some new kind of government-sponsored pension system, researchers have reaffirmed what we continue to hear about every day: Middle-class workers are going to be vastly unprepared for retirement in the coming decades.

Boston College's Center for Retirement Research has studied the pension coverage problem in the private sector and concludes that just 42 percent of working Americans aged 25-64 still have any form of pension related to their jobs.

Worse, coverage from other forms of retirement savings plans including 401(k)s is indeed spotty and the college's research indicates that more than 20 percent of workers who have access to a 401(k) plan choose not to participate. And with Social Security's continued spiral to instability, it's left more than one generation with dangerous prospects looming on the horizon.

What's the solution? As the authors state, both the private and public sectors have offered a few proposals to try to create a more universal system promoting predictable retirement savings inititatives for workers, but little action has been taken so far - especially with a volatile election season now underway.

President Obama's proposal for Auto IRAs, included in his 2013 budget, offers one alternative, providing a mechanism for employers with more than 10 workers but no established pension fund to withhold 3 percent of the employees' pay and place it in an IRA - either a Roth or a traditional IRA plan. A tax credit available to employers and the incentive of a Saver's Tax Credit for the participants might help sweeten the deal.

There's also Sen. Tom Harkin's proposal for a government-mandated, privately managed DC pension program, a hybrid alternative which would provide automatic coverage to all American workers not currently enrolled in an employer-sponsored plan.

With the contributions mixed into a broad portfolio and the payments factored in the form of an annuity, Harkin's plan hopes to minimize market fluctuations and provide a more steady stream of lifetime income for participants.

Boston College researchers also dug into the proposals made by the private sector, including the National Conference on Public Employee Retirement Systems' idea to establish a cash balance DB plan for private sector workers, with money managed in the same pay state pension funds have been.

California and nearly a dozen other states have also tried to establish their own retirement savings trust plans, the California version requiring employers with more than five workers to enroll their employees in a program withholding three percent of their pay into a cash balance-styled DB plan - the funds of which would be held in insurance-protected individual IRA accounts.

Great proposals, but do any of them hold water? Researchers Alicia Munnell, Rebecca Cannon Fraenkel and Josh Hurwitz conclude that the major issue is that automatic IRAs and the public sector programs tend to place all of their retirement eggs into the 401(k) basket - and suggest that that 401(k) proceeds will not produce adequate lifetime income for most retirees.

The typical family 401(k)/IRA balance of just $120,000 will, on its own, generate little more than $575 a month once annuitized.

"Clearly, more retirement saving is needed," the researchers conclude. "The United States needs a new tier of retirement income. But given the modest replacement rates from Social Security and the low level of 401(k) balances, the more comprehensive the additional tier, the better."


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