Rome wasn't built in a day, and neither is an ownership society

The title of this NY Times article is, "When It Comes to Managing Retirement, Many People Simply Can't."

I'll admit it, the headline made me read the article. Score one for the Times. But there's a lot more in that article than just that one-liner. A more accurate title would be, "Some People Enter Retirement With Too Little In Their Private Accounts; Reasons Vary." You now see why I'm an economics professor and not a headline writer.

One very important reason mentioned in the article was that some people start saving too late in their working years. 401(k)s and IRAs are a relatively new invention. Two people mentioned in the article saved for only 17 years. A 22 year old college grad could save for more than 40 years if they start right after they get their first job. This is a pretty good argument for making private accounts a part of Social Security (whether they are a carve out or an add on is less relevant to my point here than just getting 22 year olds to do it automatically and steadily--let's save the carve out/add on argument for another day). Saving for retirement must begin early. Rome wasn't built in a day. I would expect that as time goes on and later generations of workers (who have had 401(k)s for a longer period of time) retire, the results will improve.

Consider this:

Ms. [Annika] Sunden [of Stockholm University and Boston College's retirement studies center] and Alicia Munnell, director of the Boston College retirement studies center, estimated that a worker making the minimum ideal contribution of 6 percent of wages to a 401(k) plan, with a company match of a further 3 percent, could do better than with a traditional pension.

If the account achieved a 4.6 percent annual return on top of inflation, the assumption adopted by President Bush based on historical returns, a worker retiring at 62 after 30 years of savings and a final salary of $52,650 would amass more than $350,000. This could provide annuity income for the rest of the person's life of roughly $31,000 a year, higher than the $26,500 such a worker would get from a typical defined-contribution pension.

Disciplined saving is a good thing. But...

In 2001, the most recent year for which comprehensive figures are available, the Federal Reserve's survey of consumer finances found that the median savings in a 55-to-64-year-old American's 401(k) or individual retirement account added up to $42,000, less than one-eighth the amount needed at 62 to achieve the retirement income estimated by Ms. Munnell and Ms. Sunden.

$42,000 is not much of a retirement nest egg. Obviously people are starting late and not saving enough. I think we've pretty much established that now. Towards the end, the article says,

Fewer than 10 percent of eligible workers contribute the maximum amount to their 401(k), and about a quarter contribute nothing at all. Many younger workers empty their 401(k) accounts when they change jobs - postponing saving for retirement.

Low savings are not the only problem. After they retire, workers must manage their savings, a task often complicated by unexpected expenses.

It's hard to imagine something worse than cashing out your 401(k) when switching jobs. If you have to use it as a cushion to tide you over to the next job (if you really must), then at least put back what you don't spend when you take a new job. The article ends with an account of how difficult retirement planning can be:

When Robert Stacy took an early retirement package from U S West more than six years ago, at 53, he had a traditional pension. But he took only half as an annuity, worth $900 a month, and the other half as a lump sum. His total savings at the time, including his 401(k) and the proceeds from the sale of his house, added up to almost $600,000.

The Stacys expected this money would be enough to roam through the country carefree in their new R.V. But six years later, the stash is down to $400,000. And the couple is facing higher health expenses since Qwest, which took over U S West in 2000, started charging hefty premiums on its retirees' health plans. So the Stacys, too, decided to take up jobs in retirement. "If I had to choose again," Mr. Stacy said, "I would have taken it all as an annuity."

Maybe so. But nothing here suggests that Mr. Stacy didn't understand his options. This seemed like a strange way to end the article.

Anyway, if the intent of the piece is to scare people away from private accounts for Social Security, it doesn't deliver the goods. The whole idea of private accounts should be to get younger workers used to saving and taking ownership of their retirement funds. Judging individual retirement accounts by the fact that most people haven't been contributing to them for very long strengthens my contention that starting young is the most important thing. An ownership society will take generations to build, but every day we wait just puts it off further.

The private accounts being discussed for Social Security would not (to my knowledge) allow workers to cash them out when changing jobs like a 401(k). That's one more problem eliminated.

Furthermore, the Hagel bill (S. 540) specifies that the private accounts be converted to an annuity on retirement. You won't have the same regret about your Social Security private accounts that Mr. Stacy did about his pension. Still another problem solved.

(Another nice thing about S. 540 compared to H.R. 530 is that the eligibility age is lower--45. I'd argue for even lower, but at least this is moving in the right direction.)

The Times article could certainly be interpreted as an attempt to show the perils of relying on private accounts for retirement (especially if you only read the headline). On the contrary, it makes an effective argument that disciplined saving over one's working life is very important. It also makes the point that once retirement hits, those savings should not be left to chance. Neither of these points is controversial.

Advocates of private accounts need to start making these very uncontroversial points.