There is little doubt that people who are trying to plan for a secure retirement face increasing difficulties, particularly since the debate on Social Security has apparently reached an impasse, and most experts do not expect to see any changes to the system this year.
But even if the system were to be overhauled, Social Security is only a small part of the picture, says Brian Graff, executive director of the American Society of Pension Professionals & Actuaries (ASPPA). If individuals working today wish to have the means to support themselves in their retirement, they themselves need to take on the burden of finding ways to put the money away and to deal with ever-rising costs, in particular healthcare expenses, which continue to rise at an alarming rate and are among the biggest costs people in their old age have to contend with. "People are going to have to look at different pieces of a larger pie representing their retirement security," says Graff. "Social security is a very small part of the equation, and it is clear that saving through 401(k) vehicles and having personal savings is becoming more and more important."
Indeed, EBRI President Dallas Salisbury said at the Employee Benefit Research Institute's (EBRI) spring forum that participants generally agreed upon the need for a "total integration of all aspects of financial security," which in addition to federal programs such as Social Security and Medicare, also calls for the inclusion of healthcare expenses and the automatic enrollment of all workers in employee-sponsored 401(k) programs, among others, to secure adequate financing for retirement. In addition, most experts also say that the onus should be upon individuals themselves to save, save, save, if they want to make sure they have enough in their retirement, even if this means cutting down on spending now for greater financial security in the future. "The bottom line is to budget, plan and save a lot more than most people do," Salisbury said in an interview. "Or, keep working."
But even though the official retirement age in America has been raised to 67 from 65, and it will likely be increased to 70, everyone's work life has to one day come to an end. Individuals therefore need to participate more in employer-based savings programs and other investment vehicles currently available to them, says Haeworth Robertson, president of the Retirement Policy Institute and former Chief Actuary of the U.S. Social Security Administration, and set more money aside during their working lives.
"Even if we didn't have these huge possible cutbacks in government programs, people have not been saving enough for retirement," Robertson says. "People need to take greater advantage of employer-based programs and also save through other private saving vehicles."
While participation in employer-based retirement savings programs has, by and large, been positive, many more people could take greater advantage of them, Robertson says. Automatic enrollment in 401(k) plans could go a long way toward ensuring the participation of a greater number of individuals in employer-sponsored savings programs, but even then, there's no question that personal savings are a must these days, he says.
Workers should also consider employer-sponsored savings vehicles like the yet-untried Roth 401(k), a new type of retirement account that received widespread endorsement at the EBRI's spring forum, and that employers can start offering next year. Under a Roth 401(k) plan, employees would contribute after-tax dollars in order to benefit from tax-free withdrawals after the age of 59 1/2.
Although the idea of forking over taxed earnings is probably not so appealing to most people, "they are probably better advised paying taxes now and enjoying their tax-free earnings later, since there is little doubt that taxes will rise in the future," Robertson says.
The Roth 401(k) has many supporters, but the Roth 401(k) may take a while to get off the ground, since it calls for a different kind of investment psyche and employers will also delay in offering it, as there is discussion about a possible repeal, Salisbury says.
"Decades have been spent telling people it is better to save pre-tax dollars, and so shifting people will be slow," he says. "[But] with the size of deficits, taxes will have to rise, therefore people should use the Roth if they have the chance."
The bottom line is that saving for retirement is a "big picture" issue, and one that is comprised of several facets. Rather than just relying on one avenue of funding--be it government programs, employer-based programs or personal savings and investments-- people need to realize the importance of all three as they pertain to their retirement security, Graff says, and ensure they are as well equipped as possible on all fronts.