Sharing Retirement Risks

The 401(k) shares the characteristic that poor investment returns don’t result in funding crises or taxpayer bailouts. That’s a good thing. But beyond that, it’s been a pretty disastrous failure in generating retirement income. To start, most workers haven’t put aside nearly enough money. That’s partly because of a myopia inherent to humans, which psychologists and behavorial economists have learned tons about in recent decades and even come up with tools to counteract. But it’s also that wages have been stagnant and too many employers stingy with matching contributions. Then there’s the sad reality that 401(k) accounts are characterized by higher fees and worse investment performance than old-line pensions — professionals really are better at this than amateurs (well,mostly). And finally, it takes much less money per person to guarantee an adequate retirement income when that guarantee is spread across a bunch of people.

According to the Melbourne Mercer Global Pension Index, the retirement system in the U.S. gets a “C” grade — “a system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements its efficacy and/or long-term sustainability can be questioned.” In the Harvard Business Review, Justin Fox argues that retirement risks are best when shared, and uses the Dutch as an example (an imperfect example, but one with a system that scored much higher than the U.S.), where more than 90 percent of the workforce belongs to a pension plan, and its funding ratio (ratio of a pension assets to its liabilities) is 104 percent. Reuters reports that the average funding ratio for state pension plans in the U.S. is under 70 percent.

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