The hard truth about Americans’ retirement options


Alicia H. Munnell has some gloomy words for Americans about retirement.

“There are only three options,” she writes in her new book, “Falling Short: The Coming Retirement Crisis and What to Do About It.” “The first is to simply accept that we are going to be poor in retirement. The second is to save more while working, which means spending less today. The third is to work longer, which means fewer years in retirement. Those are our only options.”

Munnell should be heeded, for as director of the Center for Retirement Research at Boston College she is one of our leading scholars of retirement economics. “Falling Short,” she told me in an interview, “brings together everything I’ve been writing about for 15 years.” The book, co-written with her BC colleague Andrew D. Eschtruth and investment consultant Charles D. Ellis, is aimed at the general public and fashioned as an assemblage of home truths.

The most important is that our traditional retirement sources aren’t up to the task of providing for an adequate post-career lifestyle.


“Social Security replacement rates (the portion of pre-retirement income it provides) are being gradually reduced,” she writes. “On the private employer side, traditional pensions are rapidly disappearing, replaced by 401(k) plans.” These “shift all risks and responsibilities from the employer to the individual, and most of us are not well prepared for this burden.”

So what are the solutions? One is to make the most of the 401(k), despite its rotten design. Munnell observes that 401(k)s originally were viewed as supplements to employer defined-benefit pensions. Workers were given broad discretion over whether to contribute and how to invest.

But they’ve taken over as the main pension offering. In 1983, 62% of workers had defined benefit pensions, 12% had 401(k)-type plans, and 26% had both; now only 17% have traditional pensions, 71% have 401(k)s, and only 13% have both. Workers who reject the option are seriously jeopardizing their retirements. Munnell lauds the 2006 federal law that encouraged employers to make 401(k)s an automatic choice unless a worker opted out. But participation is still poor, as only 80% of eligible workers have 401(k)s and only 10% contribute the maximum permitted (up to $17,500 this year, or $23,000 for those 50 or older).

Munnell advocates shoring up Social Security, but not by cutting benefits. “It always sounds ‘fair’ that you’re going to solve the problem half with revenue increases and half with benefit cuts,” she told me. But given how strained Americans’ retirement resources will be, “no cuts is absolutely the way to go.” She calculates that a payroll tax increase of 2.88 percentage points, split between employers and employees, would make the program solvent for the next 75 years. She also says that allowing the system to invest some of its surpluses in equities — by law, they can be invested only in Treasury securities — is “worthy of a thoughtful conversation.”

One of Munnell’s most interesting ideas concerns Social Security’s “legacy debt,” which is perhaps the least-understood but weightiest factor in the program’s long-term financing. This is the debt the system incurred by paying the first generations of covered workers more in benefits than they had earned by their contributions. It still exists, and every subsequent generation has been paying it down, resulting in a slightly poorer return on their contributions.

Congress made the deliberate choice in 1935 to cover a reasonable retirement for those first generations. They had fought in World War I and been ruined by the Depression (and would shoulder the burdens of World War II). Based on their meager contributions, workers earning the median family wage of about $100 a month would be entitled to a risible pension of 48 cents a month, Edwin Witte, the Social Security Act’s drafter, advised Congress. Instead, the act provided for pensions worth 15% of their annual wage.

We’re still paying the bill — but not all of us at a fair level. Wealthier workers get a pass to the extent their wages surpass the payroll tax cap ($117,000 this year). But there’s no reason they shouldn’t pay their fair share of a debt to America’s parents and grandparents. Munnell advocates transferring the legacy debt cost to the federal income tax. That would “shift the burden to the general population in proportion to the ability to pay.” The shift would require an increase in the average income tax rate from 19% to about 23.6%, which she acknowledges would be “extremely difficult in today’s political environment.” But the debt has to be paid somehow.

In a couple of respects, “Falling Short” may be too narrow a treatment of the retirement crisis. I would have liked a serious discussion of the most visionary idea for Social Security being advocated in Washington, which is to expand benefits, not merely keep them stable.

Nor does the book focus on the macroeconomic factors that have made it so hard for the working class to keep up, mainly the stagnant or declining share of economic growth for middle- and lower-income workers. Income inequality not only deprives them of the resources to save, but cheats Social Security of a fair share of the national income. (In 1983, fully 90% of all wages was subject to the Social Security payroll tax; by 2012, the sharp rise in income collected by the wealthy had reduced that ratio to about 83%.) Plainly, rising wages during their working years would alleviate at least some of the threat of a poverty-stricken retirement.

In reality, many workers’ retirement choices are dictated by employers. Munnell advocates, properly, that those who can work longer do so, but she doesn’t pay enough heed to the fact that not even the able-bodied and mentally fit can make this choice unilaterally: It requires willing employers and an accommodating economy.

It’s right to advise that we “keep our skills up to date and be responsive to the needs of our employer.” But many businesses large and small don’t value the skills and experience of mature workers as much as they detest the wages and benefits they shell out to keep them on the job. Age discrimination and the experienced and knowledgeable worker forced into retirement by a cheeseparing corporation aren’t myths.

Still, “Falling Short” is a primer on the choices confronting Americans in today’s world rather than an economic tome. Americans have not been facing up honestly to their prospects in retirement. “Falling Short” will help them do so.

Michael Hiltzik’s column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at, reach him at, check out and follow @hiltzikm on Twitter.