Enjoying Retirement, or Not

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The other day an article appeared in the Wall Street Journal talking about the origin of the 401(k) program and how some of those that championed it now lament what has happened. In a synopsis, the development of 401(k) was supposed to be a supplement to the pension a retiree received from the company they had toiled long years in service. It was to be part of a three-legged retirement plan that consisted of your pension, your 401(k) and your social security income. With all three of these sources in place most retirees would be comfortable in retirement and be able to live out their golden years without worrying about every penny.

But as they say in the movies “ a funny thing happened on the way to the church.” Companies began to do away with the defined benefit plans (pensions) that had been the backbone of employee retirement income. They supplanted them with more aggressive employee contribution plans and in some cases the employer contribution even began to fade away.

Now we can lament what has happened or we can face the music and make adjustments. There have been a number of suggestions that would require employees to enroll in a plan if the company offers it and some would require companies to make large contributions to each employee’s plan.  Both are noble suggestions but they are difficult to enforce without some major change in the law. Social norms also tell us that some employees would balk at being told they have to save, particularly young workers who cannot spell retirement let alone thing about saving for it. The fact does remain that if you get into a 401(k) system early in your career and religiously contribute to it you will have a tidy sum when you hit retirement age.

Personally I saw the value of these programs and tried to use them whenever possible and I have passed that value on to my four daughters and I know that each of them are using tax deferred plans to save for retirement and started doing so as soon as possible. It is exactly that issue that is the main point of what I am writing about today.

In 2006 I was involved in an effort to make an adjustment to 401(k) plans that I think helped get more young people involved. Prior to that time when you were first hired at a company the human resources officer would ask you if you wanted to enroll in the companies plan. Basically you had to make a decision to opt in or you would not be included. Way to many young people were deciding not to enroll because they wanted those dollars in their pockets and had to many things they wanted to by to think about retirement. After all, that was 40 years from then and they had plenty of time.

Now the question is a bit different. They will automatically enroll you in the plan and now the human resources officer will ask if you want to opt out of the plan. That subtle change has brought a lot more young people into the plan since they are afraid that opting out would be negative in the hiring process.   In fact it is nothing to the company. But getting in early is a positive and once they have been in a few years they start seeing the money grow and eventually they get excited about how much they are saving.

But the fact remains that we as a nation are lagging in saving for our retirement and something needs to be done to raise our saving levels or we will face a crisis down the road. Some have called for a government mandated enrollment in either a company run program or a government run program that would require each employee to contribute 6% of their pay to their retirement. Democrats looking at this issue lean towards a government run program similar to Social Security. This is a bit odd since they also recommend that investment professionals manage the funds. If this is such a good idea for this type of fund why is it still a bad idea to do the same with Social Security?

Now I have some recommendations that are not as drastic as either of these types of proposals. Under current law if you are an employee of a company that sponsors a 401(k) program you can contribute to your account up t o$18,000 and if you are over age 50 you can contribute an additional $6000 for a grand total of $24,000. Your employer can match contributions at whatever level the company feels fiscally comfortable doing but the total amount going into the account cannot exceed $54,000.

Now lets compare this to a Simplified Employee Pension (SEP) if you are self-employed. Again you are constrained by the overall cap of $54,00 but you get to make that choice, not some employer.

So why the difference? The simplest reason is that when these programs were first developed it was assumed they would be a supplement to the pension you receive from your employer. If you were self-employed you would not have the benefit of such a pension so you would have to save more to make up the difference.

Since many employers are eliminating defined pension programs and contributing less than the cap for a 401(k), with some nothing at all, why not allow the employee in a 401(k) plan to contribute more to reach the $54,000 cap if they are able?

This has been proposed in the past and has been shot down by Democrats in the Congress as being a program designed to benefit the “wealthy.” In reality nothing could be further from the truth. This change would benefit the middle class who are scared to death about retirement. The typical scenario is a husband and wife that have raised three children. They are both in the workforce but the sheer economics of raising those children have forced them to delay saving for retirement. Suddenly they are approaching 50 years old and that dream of retirement is no longer in the distant future but rather right upon them. They now have more disposable income to save with the children gone and the obvious solution to their retirement dilemma is to allow them to save more.

Some Congressional critics have argued that this will “score” in a budget cycle. [To score is a budget term referring to the revenue impact of lost taxes] I agree but it is a short term scoring loss that will be made up when the people retire and have higher incomes in retirement. It might actually be a savings because many will be less dependent on other government programs. Mom and Dad could ease themselves into retirement and live more comfortably. Not everyone will be able to afford this increase in donations but for those that can it will certainly be a benefit.

 

So come on Congress. We don’t have to reinvent the wheel. The programs for individual savings are right there and will a little tweaking a lot of people could benefit. It is not a mandated government program and we all know what happened to the fiscal soundness of Social Security once the government got its hands on the money drawer.

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