The holidays are a time when we express gratitude for making it through another year, and for the family, friends and co-workers who helped us do it.
But with each passing year, we also come closer to retirement. And for that we may want to show thanks for something that is seldom mentioned: a retirement system that has grown significantly stronger over time, and which today helps the vast majority of Americans live well in old age.
That our country's retirement system is working well is so counterintuitive that even many experts have a difficult time processing the idea. We are inundated, seemingly every day, with bad news regarding retirement:
"Americans Entering Old Age the Least Prepared in Decades," The Wall Street Journal says.
"Bankruptcy booms among older Americans," The New York Times tells us.
"Retirees will outlive their savings by a decade," says The World Economic Forum.
Half of older Americans have no retirement savings, the Government Accountability Office says.
"Social Security benefits have lost one-third of their buying power since 2000," The Washington Post tells us.
"Retirees' reliance on Social Security nears an all-time high," warns USA Today.
All of these proclamations, I might add, are provably false. Not just technically false or false in some minor way, but often expressing the opposite of what has actually happened.
And yet, this sort of media coverage leads many Americans to despair that, in the words of Jane Bryant Quinn, our nation's "retirement system is broken."
Pension Realities
But when we skip the media articles and simply look at the data, a very different story emerges in nearly every area of retirement savings. This story is far more encouraging and gives us hope for our own retirement and those of people we care for.
Many retirement advocates pine for the days of the traditional "defined benefit" pension. Yet rose-colored glasses prevent them from recalling that less than 40% of private-sector workers participated in a DB pension, even at their peak in 1975.
Or that, according to a 1972 congressional report, 9 in 10 workers who formally participated in a traditional pension failed to vest in their benefits. In a 1981 Social Security Administration survey of new retirees, only 27% reported receiving any private pension benefit. Among the bottom half of the income distribution, it was just 9%.
Today, it's a dramatically different story. In a 2015 analysis of IRS data, the Social Security Administration found 61% of private-sector workers participating in a retirement plan, with an additional 14% offered a plan but not enrolled. Similarly, a 2017 Census Bureau analysis found 61% of Americans 65 and older receiving benefits from a private retirement plan.
401(k) Advantages
Whatever their shortcomings, the introduction of 401(k) retirement accounts in 1978 marked an inflection point in Americans' retirement savings. Federal Reserve figures show that in 1978, total retirement plan balances were equal to half of employees' total wages and salaries, with savings-to-salary ratios rising about 1 percentage point per year.
But from 1978 through 2020, the ratio of retirement savings to the employee wages they must eventually replace increased by nearly 8 percentage points per year, with total savings rising sevenfold and currently sitting at 375% of employee wages and salaries. Other data, from the Federal Reserve's Survey of Consumer Finances, show retirement savings increasing in every age, income, educational and racial/ethnic group.
We all know that 401(k)s aren't perfect, but they have two key advantages over traditional pensions. First, employers are willing to offer them. The passage of the Employee Retirement Income Security Act in 1974 loosened vesting requirements for DB pension benefits and tightened funding standards, which was good. But these steps also led to an immediate and continuing decline in the share of employees offered a pension.
It turns out that when employers actually had to pay the benefits they promised, and were required to put up money to back it up, traditional pensions weren't as attractive an employee benefit. While 401(k)s face challenges with administrative burdens and, increasingly, liabilities to employee lawsuits, employers are simply more willing to offer them.
Second, while private-sector pensions were funded almost exclusively through employer contributions, 401(k)s receive contributions from both employers and employees. Bureau of Labor Statistics data shows that employers have largely maintained their contributions to retirement plans, while the addition of employee contributions has boosted savings to much higher levels.
In 1975, private-sector retirement plans received total contributions equal to 5.8% of employee wages; in 2020, contributions reached 8.6% of pay, fully 48% higher.
Rising Retirement Security
The result of broader retirement plan participation and higher contributions has been rising retirement incomes. Congressional Budget Office data show that, since 1979, the inflation-adjusted average household income of Americans 65 and older has risen by 119%, more than doubling.
