About that WSJ article on 401(k)s

Andrew Biggs at the American Enterprise Institute sets things straight:

More Americans saving more, with retirement incomes at record levels. That’s the failure of 401(k)s?

The Wall Street Journal ran a story yesterday with a great hook: the pioneers of 401(k) retirement savings plans now regret how prominent those plans have become. These early 401(k) advocates believe that retirees would have been better off had we stayed with traditional defined benefit (DB) plans.

“Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.”

The Journal had a great hook. Unfortunately, that’s about all the story comes with. The Journal’s reporting is short on data and long on sources and factoids that agree with the story’s premise. In reality, retirement saving and retirement incomes have improved, and 401(k)s have been part of that story.

In a traditional “defined benefit” (DB) pension, the employer offers retirees a fixed benefit, guaranteed against market risk. In a “defined contribution” pension like a 401(k), employers instead promise only a fixed contribution each year – say, 3% of employee pay – while employee themselves bear the market risk. Risk is bad, so the shift from traditional pensions to 401(k)s must also have been bad for workers. Right??

Not exactly, because there’s a lot more to the story than that.

Part of the Journal article’s problem is just crappy journalism. For instance, the Journal cites three sources who are on one side of the retirement saving debate, but no one on the other side. And there is a debate: unbeknownst to most newspaper readers, peer-reviewed academic studies of retirement saving show a much smaller problem than do advocacy groups like the National Institute for Retirement Security, who the Journal cites. NIRS, for instance, claims that total retirement savings are roughly 25% below where they need to be for retirees to maintain their pre-retirement standard of living. But University of Wisconsin economists John Karl Scholz and Ananth Seshadri found in two articles that on average U.S. household are saving enough for retirement. About one-quarter of households aren’t saving enough, but shortfalls where they occur tend to be small. For their work, which has been cited hundreds of times by other academic studies, Scholz and Seshadri won TIAA-CREF’s Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security. But the Journal cites the NIRS study – which is, frankly, not very good – while ignoring the real research? That does no one any favors.

But even laying out some basic statistics can help, if those stats are accurate. For instance, the Journal article features a nice chart – under the headline “Savings Struggle” – showing a declining U.S. personal saving rate since 1970. Some might take that falling saving rate as denoting that workers are putting away less money for retirement. Actually, not. The reason is that the total personal saving rate also includes the amounts that retirees are drawing down from their savings (or DIS-saving) , which lowers the saving rate. And guess what? There are more retirees today than in the 1970s – one-third more, relative to the working-age population. As I’ve pointed out, the total personal saving rate says very little about retirement saving adequacy because, over a person’s full lifetime, their personal saving rate should be zero.

Will even better models for saving for one's sunset years continue to appear? Certainly, if people are left free of government interference in their pursuit of quality lives.