401(k) Accounts are Not Retirement Plans
By Raymond Edmondson, Jr., CPPT
CEO, Florida Public Pension Trustees Association
In response to a Tuesday, March 6th commentary by Peter Ferrara, “Defined Contribution Plans Best Investment for Florida Public Retirees”, we beg to differ about the ability of defined contribution, or 401(k) accounts to provide retirement security.
The 401(k) is not the solution to retirement security, it’s the problem. It was never intended to be a retirement plan, but rather a tax deferred savings account for high earners. Strict limits on how much money can be deposited into a 401(k) yearly are tied to earnings, so unless the employee is a top earner, this account will never provide enough money for a secure retirement.
Furthermore, the premise that individuals, uneducated about investment strategies and risk management are capable of building a lifetime retirement fund is irresponsible.
Most 401(k) investors not only fail to have the financial training required to build healthy retirement funds, but they too often fail to contribute with every paycheck (public workers are required to contribute); they frequently dip into their retirement funds when money gets tight (public workers cannot); and they often cash out when they change jobs, (public workers more often finish their careers in the same job).
Promoting 401(k) accounts in place of defined benefit plans will not help middle-class workers, but it will put money in the pockets of people selling financial products.
The average 401(k) balance in this country is just $65,000 and millions have no access to a retirement plan at all. As workers age and shift their savings to more conservative investments, their earnings decline significantly, shortening the time they have to save. And those unfortunates who retire in a down market are brutally exposed to unrecoverable losses.
Yet, there are still people pushing for defined contribution retirement accounts for public workers. This is nothing more than passing the buck, trying to find a solution to problems created when our elected officials spend too much money. The spenders (government) want the savers (pension systems) to bail them out.
A recent Government Accountability Office report revealed a primary reason many local pension plans have large liabilities is because municipalities failed to maintain their actuarially required contributions. What did they do with the money they promised to contribute for the benefits they signed off on?
Locally controlled defined benefit pension systems, properly funded and managed, have been providing true retirement security for the past 150 years. And retirees put that money back into the economy.
The National Institute on Retirement Security, this week issued a report measuring the economic impact of defined benefit pension plans on local and national economies. It was prepared in conjunction with the U.S. Senate Committee on Health, Education, Labor and Pensions.
The study’s conclusions: Pension spending supports 6.5 million American jobs and generates $1 trillion in economic output annually. For each dollar paid out in pension benefits, $2.37 in total economic output was supported. For each dollar contributed by taxpayers to state and local pension funds, $8.72 in total output was pumped back into the economy.
The guarantee of a monthly check adds greatly to the strength and durability of our economy, but also to our social fabric. Who will support aging retirees when their savings accounts run dry? Taxpayers. The FPPTA has long insisted the problem isn’t that the public sector has too generous a retirement benefit, but rather the private sector doesn’t.
It’s time for all working Americans to demand a system that offers financial security – not welfare dependence – in old age; a system that will contribute to the strength of our economy for future generations. We should turn our collective efforts to finding new ways to sustain the defined benefit pension model and bring it back to the private sector.
