It’s been 30 years since the Individual Retirement Account model, or the 401(k), became the standard way for Americans to save for retirement. And it has failed — or so says Teresa Ghilarducci, professor of economics at the New School for Social Research.
In a commentary in last weekend’s Sunday New York Times, Ghilarducci argued that the 401(k) savings account, which puts the onus for saving on the future retiree, no longer works. She says that most Americans don’t grasp the complexities of planning for retirement, and that’s to be expected.
The 401(k) model “expects individuals without investment expertise to reap the same results as professional investors or money managers,” she writes. “What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”
As it stands now, the current system requires ordinary people to not only accurately predict financial risk, but to anticipate unanticipated factors. For an IRA to be successful, retirees must accurately predict when they will stop working, and even when they and their spouses will pass away. For this reason, Ghilarducci argues, no amount of financial literacy courses will make people succeed in retiring comfortably.
American financial savings are meager, and with unpredictable factors like illness, the typical American couple is not prepared to retire on its IRA. "We have a system that practically guarantees that aging will be a gateway to poverty," Ghilarducci says. "I'm seeing the risk of poverty filtering up to the middle class." She writes in her editorial that 49 percent of middle-class workers will be poor or near poor when they enter retirement.
"It's 'magical thinking' only when you're 55 and you realize that these plans aren't working," Ghilarducci says. "We need an expanded social security system that expects people to be human beings." Her plan is to institute a new, mandatory retirement account that would be professionally managed to provide a guaranteed rate of return.
"You don’t like mandates?" Ghilarducci asks in her commentary. "Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster."