With the first of the Baby Boom generation having reached the traditional retirement age of sixty-five in 2011, the number of retirement age individuals is expected to grow by 10,000 each day for the next fifteen years.
By 2030, when the last of the Baby Boomers will have turned sixty-five, an estimated 18% of the US population, or sixty-five million Americans, will have reached retirement age.
Up In Smoke provides a startling examination of the status of each of our nation’s retirement systems and explores how a pending retirement crisis could threaten the US economy. Those nearing retirement, as well as generations to follow will increasingly be seeking an understanding of how we arrived at this difficult place and what hope lies ahead. Up In Smoke provides those insights.
Richard DeProspo is an investment professional with over 30 years’ experience advising state and local governments throughout the country. An expert on public employee pension management, he has lectured widely on the topic and advised numerous municipalities and public pension funds on the proper management of employee retirement liabilities.
Mr. DeProspo holds B. A. and M.B.A. degrees from the State University of New York. Up In Smoke in his first non-fiction work.
The underpinnings of the US retirement crisis can be traced to the Revenue Act of 1978, the legislation that created the 401(k) and IRA account. Intended by Congress as a quick fix to US tax law, and not as broad retirement policy, the new plans nonetheless grew quickly in popularity.
Corporate America seized the opportunity to offer the new defined contribution plans to employees. Equipped with a new retirement option, these same companies quietly exited the defined benefit plans that had both dominated US retirement funding for fifty years, and created enormous liabilities for corporate balance sheets.
But the 401(k) and IRA suffered their own design flaws and limitations, a fact that America would not discover until some thirty years later.
Up in Smoke
The evidence of the retirement system fraying is abundant. From well documented under-saving, to the social security system that is projected to run out of funds by 20331, America’s retirement is on the ropes. From employer sponsored defined benefit plans that have thrown endless companies into bankruptcy, to the troubled public employee pension plans that threaten the solvency of major US cities, we have a serious retirement problem. Despite each of these programs failings, however, as desperate and troubled as they have become, they pale in comparison to our nation’s greatest failure in systematic retirement planning, the 401(k).
As we will see, the 401(k) plan, IRAs and other defined contribution benefit plans, all relatively recent creations of Congress, were nothing more than an experiment in self-directed retirement planning, with speculative outcomes for retirees from their very inception. The widespread availability of defined contribution plans was engineered by Congress, not as a bipartisan measure of broad retirement policy, but rather as a quick fix to then current tax policy. But it wasn’t long before corporations and the financial services industry saw the opportunities provided by these new retirement savings accounts. With the rapid corporate adoption of new 401(k) plans (and a corresponding off-loading of traditional defined benefit retirement plans) the 401(k) served as the ultimate vehicle to heap the precarious and inexhaustible societal burden of elderly care back on the employee (and thereby relieve the employer). Today with an estimated eighty-eight million participants2, these accounts are by all measures a dismal failure.