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Retirement Substitutes Deserve A Look

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Los Angeles Times

Published: November 22, 2008

WASHINGTON - For nearly three decades, working Americans have been part of a huge experiment with their future well-being: Old-fashioned pensions that guaranteed specific retirement benefits have given way to old-age benefits that depend on personal investing in the markets.

But now, with those markets in crisis and the value of workers' investments plunging, a bundle of ideas for modifying the system or replacing it entirely - ideas shunted aside when the stock market was soaring - are about to get a careful look.

For one thing, Democrats have campaigned on the promise of a better deal for middle-class Americans. Also, many workers are aghast at the discovery that their retirement years might be a lot less golden.

Even for people who faithfully have participated in the new retirement plans, which depend on savings and investment in 401(k) and similar accounts, much, if not all, of what they gained in the stock market in the past 10 years has been wiped out.

The present system is called into question because millions of Americans have not had such plans available to them or have not participated for other reasons, including stagnant incomes that made saving difficult or impossible.

"The current 401(k) system has not turned out to be as secure as we want it to be," said Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee. "It has not provided the returns that we want it to. And it's not provided the level of savings that we want it to.

"Should there be a serious reassessment? Absolutely," he said.

Miller's committee has held two hearings. At one, a professor from New York's New School for Social Research called for creating government-backed retirement savings accounts that would offer a guaranteed, inflation-adjusted 3 percent return. The government would contribute to the accounts, using money gained by eliminating about $80 billion in annual tax breaks for 401(k) savings.

The idea received a serious hearing before Congress.Other ideas for overhauling the 401(k) system are being advanced. Jacob Hacker, author of "The Great Risk Shift," has proposed a variation of guaranteed government retirement accounts.

And the Aspen Institute's Initiative on Financial Security last year proposed several changes, including individual retirement accounts that have a government contribution match for lower-income workers and guaranteed annuities to supplement Social Security.

The pensions many U.S. corporations used to offer were known as defined-benefit programs because employers promised to pay specified benefits, usually based on workers' earnings and years of service. The predominant system today is known as a defined-contribution plan. Workers agree to have amounts deducted from their pay and put into investment accounts such as 401(k)s, receiving tax breaks as an incentive to participate.

The transformation allowed people to benefit if they made smart investments - or if the markets soared. But it put retirement income at risk when the economy turned.

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