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The 401(k) system doesn’t work

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Jeremy Hobson: So what are we doing all of this hard work for? If it’s not because we love it. ot could be because we’ve got a goal in mind. Say… retirement.

But commentator Teresa Ghilarducci says without government intervention all our labors could be for nothing.

Teresa Ghilarducci: For most Americans, the point of a lifetime of hard work is retirement, and for more than 30 years, we’ve seen the 401(k) as the means to that end. But after a generation-long experiment, it’s obvious a new retirement savings model is necessary.

The case against the current system starts with horrific statistics about the vulnerability of soon-to-be retirees. Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Almost half of middle-class workers will be poor or near-poor in retirement, living on a food budget of about $5 a day.

Our do-it-yourself pension system has failed because it expects individuals to know when when they will lose their job, get sick, get divorced, lose a spouse and eventually die.

Few realize that to maintain living standards into old age, we need roughly 20 times our annual income in financial wealth. If you’re earning $100,000 the day you retire, you’ll need to have savd $2 million above and beyond what you’ll get from Social Security if you want to continue the lifestyle you’re used to.

That number may sound exaggerated, but people underestimate the high costs of aging. Consider this: If you start saving for retirement at age 25, you’ll need to hold on to 7 cents of every dollar you earn and your investments will need to earn 3 percent after inflation and fees, if you hope to get to the magic number. If you didn’t start saving until you were 55, you’ll need to keep 30 cents of every dollar and you might make it.

Scared? Good. We need that fear to motivate us to get real. The coming retirement income security crisis was not caused by a set of isolated individual behaviors; the system was simply never realistic.

We need government-mandated, guaranteed retirement accounts on top of Social Security. These would be professionally managed with a guaranteed rate of return paid out as annuities. This is a sensible way to get an aging society prepared for the future.

Afraid of mandates? For most, the alternative to a successfully executed retirement plan is much scarier.

Hobson: Teresa Ghilarducci is the Bernard Schwartz Professor of Economics at the New School for Social Research in New York City.

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