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Rebuilding Retirement After the Pandemic

The coronavirus crisis has revealed some enduring flaws in America’s civic immune system. It may have also illuminated a time-honored cure.

Mark Wilson/Getty Images

With more than 30 million people in the United States currently out of a job, it’s not terribly difficult to imagine not working. But the coronavirus-related economic shocks have lately made it hard to envision exiting the workforce with much dignity. Even retirement, which was once taken for granted as the sure (if distant) means by which we’d all seamlessly transition from our years of labor to our years of rest, now seems like a shakier promise than ever before with the economy in ruins. At the end of April, the investment giant Fidelity found that the average 401(k) balance had fallen by nearly 20 percent as a result of the Covid-induced financial crash; around the same time, Marketwatch reported that some employers had started suspending 401(k) matches for employees. And just last Sunday, one Washington think tank speculated that Social Security could be insolvent as soon as 2030, thanks to the recent shock of mass unemployment on the payroll taxes used to fund the program.

As worrying as these blows to the country’s retirement system are, they are only the most recent assaults on an already inadequate, makeshift arrangement that’s been sliding deeper into crisis for years, if not decades. Retirement, for the majority of people, will be unattainable if nothing changes. A 2016 report from the Economic Policy Institute, for instance, found that nearly half of prime working-age households (that is, households headed by someone between the ages of 32 and 61) lacked a retirement savings account like a 401(k). According to one estimate last year from the U.S. Federal Reserve, a quarter of all Americans—including 13 percent of people over 60—had nothing saved for retirement whatsoever. And even for those with funds set aside for the so-called golden years, they’re often not enough: Nearly half of respondents in a 2018 Gallup poll said they were expecting to run out of money in retirement. “If we do nothing in the next 12 years, 40% of middle-class older workers will be poor and near poor elders,” economist Teresa Ghilarducci wrote last year.

One reason why our retirement system is in such nightmarish condition now is the rise of individual contribution plans such as 401(k) accounts and IRAs, which have largely supplanted the type of employer pensions that once funded the retirements of both public and private sector workers. If you entered the workforce after the mid-1980s, chances are a 401(k) is the only retirement option you’ve ever known, yet they were never meant to be a primary method of funding retirement. The 401(k) was originally simply a section of the tax code (as its inelegant name suggests) that allowed high-earning professionals to defer taxes on bonuses and other compensation, which ended up spawning a much cheaper alternative to traditional pensions for employers. Early champions of 401(k)s as retirement savings vehicles pointed to how much those investments could grow with the market.

But there was an obvious flip side to that lucrative promise: It also exposed your savings to the depredations of the market’s downturns. Now, as The Wall Street Journal reports, those who evangelized for 401(k)s are feeling a pinch of regret. Herbert Whitehouse, an executive who championed 401(k)s at Johnson & Johnson in the 1980s, told the Journal that he’d had to delay his retirement after the 2008 financial crash took a huge bite out of his retirement savings. In addition to being vulnerable to the volatility of the market, 401(k)s are often subject to high fees by the investment firms that manage them, often unbeknownst to account holders. As journalist Helaine Olen put it, “Whether the stock market goes up, down or sideways, the financial services sector makes out when it comes to your retirement accounts.”

Since its conception, the 401(k) system has also exacerbated a number of racial and socioeconomic inequalities, which probably doesn’t come as much of a surprise to anyone who pays attention to the uneven impacts of the economy with some regularity. “Black workers’ participation in employer-based retirement plans used to be similar to that of white workers, but black workers began lagging behind white workers in the 401(k) era, while Hispanic workers fell even further behind,” EPI economist Monique Morrissey wrote in her 2016 analysis. She further found that the median retirement savings of a white family were almost $50,000 greater than those of Black and Latinx families, and that the Great Recession had predictably widened the already yawning gap in retirement savings between the affluent and the poor.

But if all that seems bleak (and it is), it’s also worth recalling that we have one ready-made solution to America’s retirement needs in the form of Social Security, which, as it happens, has been the only reliable pillar of retirement in the U.S. since its creation. Social Security, a component of the New Deal, was the answer to the retirement crisis provoked by the Great Depression. As journalist Rachel Cohen wrote for The New Republic, private pensions—established a few decades prior as a concession by capitalists to stave off public criticism and worker revolt over aging manual laborers battered by overwork—collapsed during the Depression, and the federal government intervened accordingly. “Observing the decimation of millions of dollars in life savings,” Cohen wrote, “the federal government recognized that it needed to step in, and created the Social Security Act of 1935.” Though Social Security payments alone aren’t enough to sustain most aging households, the Census Bureau has estimated that a majority of seniors today would be living in poverty without them.

While it’s true that Social Security will swiftly run dry if left untended, legislators such as Bernie Sanders and Elizabeth Warren have floated commonsense proposals to shore up and expand the program over the next few years. (One such fix includes removing the payroll tax cap, which, in 2020, exempts income above $137,700—essentially a tax break for high earners at the expense of the program.) Social Security has also been the long-running target of various deficit hawks (including, at one point, the Democratic nominee for president), but among the general public—and particularly among the age group that both receives Social Security and turns out to vote—it’s such a popular program that threats to cut it reliably provoke a public backlash and a fresh reminder that the program remains “the third rail of American politics.”

There is, nevertheless, an opportunity at hand to address the looming retirement crisis and bolster the future of Social Security. Democratic legislators would be wise to seize it, particularly in an election year, when the vast majority of Americans are facing a future of economic uncertainty. The current volatility of both the stock market and the labor market is yet more evidence that the system of individual saving via 401(k)s won’t be enough. Here, in this fraught moment when we’re all caught between a worrisome public health crisis and the economic damage we’re enduring to lessen its impact, it can feel like an inopportune moment to look so far down the road and press for the kind of change that seems geared toward addressing a far-off future. But as the EPI’s Monique Morrissey told The New Republic, “Nothing that’s happening in this pandemic is a reason not to expand or rely more on Social Security.”