Three-Pillar Retirement Status
Historically, experts have touted the benefits of a three-pillar system for funding retirement. Under that three-pillar system, American individuals relied on a combination of government benefits (via the Social Security and Medicare programs), employer-sponsored retirement benefits and personal savings to provide a reliable stream of income during retirement. Recent studies have indicated that Americans feel increasingly responsible for shouldering more of the burden in terms of the personal savings pillar.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about whether the three-pillar system for funding retirement has become obsolete.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: The retirement planning system in this country has shifted dramatically over the past several decades--shifting from a defined benefit model to a defined contribution model. Yes, this system puts greater responsibility on the individual to save to fund their own retirements. We shouldn't view this as a negative issue. We should instead be working toward a system of personal accountability and personal responsibility when it comes to funding retirement.
Bloink: The three-pillar retirement funding system is one that we should be seeking to strengthen--not dismantle. The system is far from obsolete. Retirement security ratings for the U.S. have dropped significantly when compared with individuals in other developed countries. Individuals who have paid into the Social Security system for decades now have to worry about whether they'll ever receive the benefits that they themselves have funded over their working years--or are worried that benefits will be cut during retirement. We should be working toward strengthening the Social Security system so that all Americans can retire with dignity.
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Byrnes: Along with the shift from the majority of retirement funding coming from employers and the government—shifting toward a focus on personal savings—has also come the development of numerous tax benefits that work to level the field for the individual, so to speak. Individuals are now given significant incentive to save for retirement--incentives that did not exist in an era when the bulk of retirement benefits came from Social Security and employer-covered defined benefit plans.
Bloink: Financial insecurity during retirement is an issue that impacts all Americans--and that includes Americans who have fully funded personal retirement accounts and don't plan to rely on government or employer benefits. Americans who are living in poverty during retirement do end up relying entirely on the government--outside of their Social Security benefits.
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Byrnes: There's no doubt that the old three-pillar system is now obsolete. Individuals now have strong incentives to take ownership and plan for their own retirement income—incentives that can and do generate significant and immediate tax savings. These incentives coupled with the benefits of compound interest growth over time have given Americans the tools to generate the personal savings necessary to avoid over-reliance on government and employer benefits.
Bloink: To say that the three-pillar system is obsolete is simply an attempt to evade addressing the real issues at hand—namely, the flailing Social Security system. Employers have new and evolving incentives to hold up their end via matching contributions, student loan matching contributions and other employment benefits. Yes, individuals themselves have powerful tax incentives to save. Now it's time for the government to step up and do their part—remembering that the Social Security system is one that has been directly funded with taxpayer dollars for generations.