« Open Access Factories | Main | AIG--My Very Own Rick Santelli Moment »

Rebuilding the Retirement Dream

posted by Christian E. Weller

Ahh, retirement – so many possibilities, so little time! Turns out that for millions of Americans the dream of a secure retirement was just a dream. From 2007 to 2008, total retirement wealth in private and public sector pension plans and retirement savings plans dropped by $2.8 trillion (in 2008 dollars).

Not all retirement plans are created equal, though. Data from the Fed show that holding gains and losses – changes in asset values minus contributions – relative to initial asset values tend to be higher for traditional pension plans than for retirement savings plans, such as 401(k) plans. Holding gains are typically used as an approximation of rates of return for these data.

The difference is nothing to sneeze at. In 2008, holding losses for retirement savings plans were equal to 28.7% relative to the balance at the end of 2007. In comparison, relative to holding losses for traditional pension plans were 24.2% -- or 15.7% less than for retirement savings plans.

This was not a one-time occurrence. Over the entire last business cycle – from 2000 to 2007 – the average holding gain for traditional private sector pension plans came to 4.0%. The same average for retirement savings plans came to less than half of this with 1.6%.

Most experts understand that this difference is the result of a range of factors. High fees are part of the story. Another part of the story is that individuals are not wired for “do-it-yourself” retirement savings plans. Individuals are more likely to be driven by emotions in investing their money than institutional investors are. For instance, individuals will follow fads and thus buy high and sell low and they will put too much money into their employer’s stock, among other similar financial decisions that adversely affect their rates of return. Finally, money matters. Employers have cut back on even offering retirement plan at work and have reduced their matching contributions to retirement savings plans since the last recession in 2001. And, when employees have the option to participate in a retirement savings plan with employer contributions, employees often leave money on the table. They are not getting the full match from their employer because they don’t know about it or underestimate its value.

A range of policy proposals are meant to address these shortcomings. For instance, there is some talk of better disclosing fees on 401(k) plans to increase competition. Also, policy can help to automate a lot of saving and investment decisions, thus reducing the effect of behavioral patterns on rates of return and getting more savers to take full advantage of the employer and public saving incentives that already exist. Rebuilding trillions in lost retirement wealth won’t be easy. Fundamentally rethinking how retirement savings plans are regulated and designed is a promising first step.


"Another part of the story is that individuals are not wired for “do-it-yourself” retirement savings plans."

More likely that individuals are constantly being fed false data from CNBC and other "objective media" outlets. Of course we can fault that critical thinking is all but dead in this country (we except those stellar individuals at this blog).

There are a lot of factors in play here, I can't cover them all at once. One point that peeves me is that the amount of pre-tax income you can save is way too small. You think socking away $4-5K a year in a 401(k) account for 20 years is really going to handle your expenses if you live another 20 years after retirement? That's like duct tape to cover the Grand Canyon.

We also have people refinancing mortgages like crazy, still in serious debt in their 50s and 60s, whereas previously a couple might buy a house (and a far more modest one than today's standards) in their 20s and be paid off (at the latest) in their 50s, leaving them another 10-15 years of earning power to set aside as well. Those people also lived 5-15 years after retirement, not 15-25 years with spiraling health care costs (and we won't even go into the conspicuous consumerism eating up those earnings either). The present time situation for millions of Boomers just ain't gonna work. But, like licking the electric 3rd rail, pointing out to the numbed and dumbed masses that their "rights to fantastic golf-laden Golden Years" won't be happening, is a guarantee of a short political life.

If the govt really wanted folks to save, it'd get rid of the tax on savings interest income (or at least have a generous tax free limit for accts up to 250K or so) and get rid of the ridiculously low ceiling on 401(k) contribs. My own personal favorite for "instant" long term gains is to pay off your mortgage early. If you consider you're paying triple the initial cost of the home (thru the miracle of compound interest at 6-7%), that's a hidden in plain sight cost drain that you could do something about. Of course, buying a more modest home is a great idea too, since humanity did manage to survive thousands of years without 2500 sq ft houses in golf course communities.

I have an IRA that my grandparents started for me in 1998, and that I haven't put anything into since it's not my primary or secondary savings. Last year it finally got back to its 1999 value, and it's back down 30%.

since I'm 28 and my income should be going up significantly due to educational/career changes, I'm not worried. but I also expect to work until 70 if I life that long.

The system has been rigged in such a fashion that almost mandates spending. aka "consumption". I agree with Mara. If they really wanted to give us an incentive to have more in savings they should eliminate or raise the amount that we can contribute to retirement. Alas the middle class is strapped with the burden of keeping the Country running and at the same time are being targeted by republicans as being "deadbeats". The rich have tax shelters and irrevocable trusts. The poor pay almost no taxes. Hucabee just wants sales tax. ????

I hate to go politico on this subject but it seems like conservatives have morphed into "Consumptionists" or "Consumertives" (just made those up) As far back as I can remember (I'm only 35 BTW) Capitalists were rarely concerned with being conservative. They were conserving the Rich! AND NO, despite what they say they are NOT for smaller government! When given the reigns, they have doubled it. (They just tell you what they want you to hear!) Where was all of that "conservatism" when we were losing (I mean lost like in not knowing where it went) billions in the Iraq war? Where were the Republican cries for firing cabinet members then? $160 million in AIG Bonuses? Give me a break! Peanuts in comparison. The Republicans kept the Wars "off budget". Does anyone remember "emergency appropriation bills" being hotly contested? Republicans were saying Democrats were unpatriotic by opposing funding? "Not supporting the Troops". Why didn't the Republicans just included the costs of the wars in the Budget then? THEY DID NOT WANT US TO KNOW THE TRUE COSTS and the TRUE deficit. Talk about the burden on future generations. HYPOCRITES!

What I hate is when poor people vote republican because they hate "socialists" and then have to go to Mexico and Canada for prescription medicines! Hello? Why do they think they have to do that? Because they regulate the prescription costs in those countries. They voted for the same people who made the predicament! I don't see them turning down Medicare or Social Security which is SOCIALISM! Hello? You want restored confidence? Then you need regulation. Us poor people need assurances by the government because that "fine print" is too small and the words are too big. Heck, law school students have a tough time reading and understanding that stuff.

Friday rant over... and no I'm not a liberal nut job. I'm a Conservative! Lets conserve and grow the middle class, energy and actually produce something in this Country instead of just gambling on financial bets!

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.