Besides causing many Americans trouble from day to day as they struggle to pay their mortgages and other bills, the financial crisis is aggravating a situation that was ominous before the bottom of the economy fell out last fall: the failure of many to tuck away enough money for their old age.
It's all part of the pressing question—now morphing from question to potential crisis—of how to structure remuneration so workers are paid enough to finance life after their working years.
In the late 1970s, 60 percent of American workers had pensions. Today only 13 percent have them. What most people have who have anything except a bare paycheck is, of course, a 401K. The federal Pension Benefit Guaranty Corporation offers some protection for pensions; there is no such protection for 401Ks.
The 401K was not designed to finance people's retirement, only to let them skim a little off their checks to enhance their other retirement income. It was alluring when it came in in 1981 because the stock market was on a good ride, while traditional pensions had become expensive to offer because people were living longer after retirement. But today it's becoming clear that, even apart from stock market risks, 401Ks are inadequate to pay for people's life after work.
Late in January, a study by Fidelity, Vanguard and T. Rowe Price found that funds in millions of 401Ks they manage dropped by 27 percent in 2008 (Vanguard's dropped 28.5 percent). Earlier, however, research by Prof. Alicia Munnell, director of the Center for Retirement Research at Boston College's Carroll School of Management, showed that people making $50,000 or $60,000 a year needed at least $250,000 to retire on, but were likely to have about $50,000 in their 401Ks.
Where do we go from here? As baby boomers grit their teeth and prepare to work longer than their parents, we may see a return to an older scenario in which many people worked until they died. Meanwhile, experts agree that the risks of 401Ks need to be reduced, by, for example, offering annuities as options within the plans.
