A time to discuss retirement policy

The Great Depression was the trigger for the creation of the Social Security system, which greatly reduced poverty in old age.The Depression also brought about tax changes that encouraged companies to offer and contribute to defined-benefit plans by making corporate-pension contributions tax-deductible.

The result was that until at least 2007, the nation had an apparently robust retirement system.

The economic crisis has revealed cracks in that system. Americans face a $6.6 trillion shortfall in retirement savings, according to a study sponsored by Retirement USA.

That is a $90,000 average deficit for each household — which doesn’t include a projection for retirement health care costs and assumes that Social Security benefits won’t be cut.

The retirement crisis should provoke study, analysis and discussion of the changes necessary to improve the mix of Social Security, employer-based retirement plans and individual saving.

Unfortunately, all three legs of this stool are wobbly. In part, this is because of the economic slowdown, but it is also because of demographic changes and increased global competition.

Financial planning and investment advisory organizations should lead the charge for such a debate.

Social Security is close to paying out more money than it takes in each year, because employer and employee contributions declined as unemployment surged in the recession. This is a short-term problem likely to become less pressing when the economy recovers and employment rises.

But a longer-term problem is the fact that because there are fewer younger workers to replace the contributions of a larger number of retiring baby boomers, Social Security taxes are likely to rise in future years.

Our employer-based system faces its own problems. First, many private employers, facing intense global competition, decided that they couldn’t bear the fixed liabilities of DB plans and replaced them with defined-contribution plans.

Unfortunately, employer and employee contributions to such plans are often inadequate to provide a comfortable retirement, even with Social Security. In addition, the market slump during the crisis reduced the value of most DC accounts.

Second, many public-employee plan sponsors haven’t contributed enough to meet their long-term obligations to employees. These DB plans have huge unfunded liabilities, which implies greater state tax burdens on residents in the future.

Individual saving for retirement outside Social Security and employer plans was virtually non-existent for much of the past decade as the nation’s private-savings rate dropped to near zero, though it has recently climbed close to a 6% annual rate. Many workers who thought that they were saving for retirement through the steadily increasing value of their homes saw the real estate crash wipe out a significant portion of their retirement capital.

Part of the weakness in the DC area can be attributed to the large percentage of private-sector employees who don’t participate in company-sponsored retirement plans.

Last year, just 68% of private-sector workers at midsize and large firms participated in any form of retirement plan, according to the Employee Benefit Research Institute. At small firms, just 36% of employees participated in any retirement plan.

In state and local government, 95% of employees have DB plans, but these are likely to become much less generous for future employees.

The country needs a thorough debate over the structure of its retirement system.