Editorial: Save retirement by reforming 401(k) laws and Social Security

By The Herald Editorial Board

Some of those who in the early 1980s helped open up the 401(k) to more workers are now having second thoughts about how the savings plans have changed retirement for Americans.

“We weren’t social visionaries,” Robert Whitehouse, a former Johnson &Johnson human-resources executive, recently admitted to The Wall Street Journal.

Sold as a way to supplement traditional employer-provided pension plans — and a third leg in the retirement funding stool that included Social Security — the 401(k) saving plans have instead largely replaced pensions as employers have sought ways to cut their expenses, the Journal’s Timothy W. Martin reported earlier this week.

In 1980, about 38 percent of private sector workers had a pension plan as part of their retirement, and 19 percent had a 401(k). Pensions and 401(k)s have largely switched positions, according to U.S. Department of Labor statistics, with 41 percent contributing to 401(k)s and only 15 percent enrolled in a pension plan.

A 401(k) is a savings plan sponsored by employers that allows workers to put a portion of their wages before taxes into a savings account, often with the money invested in mutual funds that generate income (or losses) depending on financial markets. As a benefit, many companies offer a matching contribution, though aren’t required to do so.

While 401(k)s are the leading avenue for saving for many Americans, there are drawbacks, especially as they take a greater role in retirement savings for many. The accounts leave workers exposed to losses in the stock market, and the accounts are often subject to hefty fees charged by money managers who can easily take advantage of those who don’t closely track their investments.

Adding to the dilemma, about 45 percent of U.S. households have nothing saved for retirement, according to the National Institute on Retirement Security. Many simply don’t have the opportunity to put money into a 401(k) account because they don’t work for an employer that offers it. A recently released survey by economists at Harvard and Princeton universities shows that a increasing percentage of U.S. workers are employed as independent contractors or through temporary employment agencies, rising from 10. 7 percent of the workforce in 2005 to 15.8 percent in 2015.

And those who are saving, aren’t saving enough or have dug themselves a deeper hole because of accumulated debt.

Financial experts, the Journal reported, recommend people save eight times their annual salary to provide a comfortable retirement. But people at all income levels are falling far short of that goal, having saved the equivalent of less than one to two years’ annual income.

Employers aren’t likely to start offering pensions again, leaving us to shore up our 401(k)s and — most importantly — protect and strengthen Social Security and increase the benefits it pays.

There have been past reforms to laws regarding retirement savings. A 2006 law allowed companies to automatically enroll employees in 401(k)s. States now have the ability to set up retirement plans.

And for those who are self-employed or whose employer doesn’t offer a 401(k), there are other options for retirement saving, including IRAs and the new MyRAs launched by the Obama administration in 2015. MyRA is a Roth IRA that allows direct deposits from a paycheck; have no fees; don’t require a minimum contribution or balance; and are invested in Treasury savings bond, protecting the investment. While it doesn’t offer a tax deduction for contributions, interest is not taxed while the money is in the account.

We have less than 20 years to implement reforms to Social Security that will ensure it can provide the support that so many depend upon. Social Security’s trust fund now totals about $2.8 trillion, enough to continue paying full benefits until 2035, at which point payroll taxes will only provide enough revenue to pay out 79 percent of benefits to the 90 million Americans who will be eligible to collect Social Security.

Plenty of reforms have been suggested and need to see debate in Congress, including a modest increase in the payroll tax and gradually raising the retirement age. More immediately, however, the 12.4 percent payroll tax’s current cap of $118,500 in annual salary must be increased to at least to $250,000, so that a fairer share of wealthier Americans’ income is paid into Social Security’s trust fund. That move alone would substantially extend Social Security’s solvency.

Personal saving should be encouraged, and enrolling in plans and keeping track of investments should be made as simple as possible. But for many, Social Security will always be the main source of income for retirees.