Earlier this year when an interviewer asked 90-year-old Air Force veteran Dillon McCormick why he was working as a superstore greeter in the sweltering Louisiana heat on Memorial Day, he responded “to eat.”

That night, a GoFundMe campaign was started on McCormick’s behalf, raising $200,000 for his retirement. Betty Glover, a 91-year-old grocery store clerk in Oregon, was rescued by similar means with a GoFundMe campaign that garnered $82,000. ¶ I could go on – GoFundMe really gets around – but you get the point. These outpourings of generosity are inspiring, even heartwarming, when read one at a time. Together, though, they are anecdotal testament to America’s broken national retirement system. Nice as it is to live among generous people, charity can’t fix the American way of retirement. ¶ To fill in the yawning gaps in the retirement safety net, we would need about 30 million more GoFundMe campaigns. Indeed, the bill for raising the incomes of the 14 million elders now living in poverty to a modest $40,000 annually would cost close to $1 trillion. And while something could and should be done by government to stabilize their living standards (not to mention the millions more near poverty), we’d have to do it all over again for the next cohort retiring and the next. Far better, then, to address the problem at its roots: the failure of America’s grand experiment in substituting do-it-yourself retirement for adequate pensions assured by the government.

American Capitalism’s Not-So-Secret Scandal

When I sound the alarm about retirement finance, my concern surprises almost nobody. Indeed, about two-thirds of Americans agree there is a retirement crisis. Black Rock CEO Larry Fink made headlines a few months ago devoting the bulk of his 11,000-word annual shareholder letter to the subject. “Nearly half of Americans aged 55 to 65,” he wrote, “reported not having a single dollar saved in personal retirement accounts.”

Details only paint a grimmer picture. The median balance of the fortunate half with retirement accounts approaching retirement age is $134,000. Better than zero, sure. But retirees need $600,000-800,000 in savings to supplement Social Security in order to sustain a minimally comfortable lifestyle.

The United States, the large economy with the highest per capita income in the world, is an outlier in this regard. I searched for charity fundraising for Europe’s elders and came up empty-handed – which makes sense since Europe’s elder-poverty rates are much lower and its nations’ pension benefits are much higher than their counterparts in America.

Using the poverty measure created in the 1960s and still widely employed by government agencies, our 65-plus poverty levels appear relatively low. But switching to the relative poverty standard compiled by the OECD, the U.S. has the dubious distinction of having the highest poverty rates among highly industrialized countries. Nearly one out of four U.S. elders must get by on less than $23,200 a year, which is half the national median income. In the Netherlands, which has a shade-lower median income, the elder poverty rate is just 3 percent.

Not only are median retirement incomes too low, they are too volatile because the income they yield is largely unprotected from inflation and financial market fluctuations. Up to 40 percent of middle-income workers risk being downwardly mobile, falling into poverty or near-poverty in retirement.

It would be nice to believe forewarned is forearmed – that once informed of what lies ahead, individuals manage to prepare adequately for retirement. In fact, while there have certainly been efforts to raise public awareness of the need to save more combined with financial incentives as a nudge, the impact has been modest. In real terms, median retirement income only increased by an anemic 1 percent (total, not per year) between 2004 and 2022. And the numbers are actually worse than they seem at first glance.

Over the period, the inflation-adjusted median expenditures for Americans 65 and older increased by 29 percent, with the cost of long-term care for chronic illness or disability a primary culprit. A 2023 study by the National Institutes of Health reveals that the average American turning 65 now will run up more than $120,000 in bills – and, of course, this does not include the very real costs of the unpaid care supplied by spouses and adult children.

Despite America’s increasingly visible retirement crisis, or maybe because of it – after all, every exposure of unwanted reality invites backlash – denial is alive and well. The deniers insist decisive action is not needed since Social Security replaces such a high proportion of low-income workers’ pay, and middle-income earners could afford to pull up their socks and save more.

Now, it is true that low-income workers have higher Social Security replacement rates (64 percent) than high-income earners (around 25 percent). But think about that for a moment. This only means households age 61-65 with median earnings of $22,000 will get about $14,000 per year. Their incomes are so low that they would need to replace 96 percent of their income – not 64 percent – to meet basic retirement needs.

If so many retirees live hand to mouth, why do so few complain? asks a skeptical Andrew Biggs, a former deputy commissioner of the Social Security Administration who is a senior fellow at the American Enterprise Institute. He notes that “most retirees report that they’re doing fine.”

Hmm … reporting they are “fine” is one of the most suspicious answers in the annals of survey research. People are reluctant to talk about their distress because of the embarrassment and stigma. When asked instead what they are most concerned about, the anxiety shows through: aging workers say their biggest worry is running out of money before they die. And in any case, it’s hard to explain away the fact that only 49 percent of respondents age 65-74 in the Federal Reserve’s May 2024 Survey of Household Economics and Decision Making said they were “living comfortably.”

But the deniers persist. A Heritage Foundation economist testifying at a U.S. Senate hearing explained that “as of the second quarter of 2023, household and nonprofit organizations held $41.5 trillion in retirement assets. This is a 331 percent increase in the inflation-adjusted value of retirement assets since 1988 (when that dataset begins).”

Again, the statements are true yet irrelevant. Average (as opposed to median) wealth is way up because high-income households have been accumulating wealth at a spectacular rate. If Elon Musk walked into my birthday party, the guests would on average be billionaires, but their financial circumstances would not have changed.

Why Working Longer Doesn’t Work

Economists and their interpreters often argue that would-be retirees typically have the option of working more years if they don’t have enough saved by their target dates. Consistent with that thought, Republican lawmakers have proposed to close the current gap between expected Social Security revenue and outlays by gradually raising the retirement age for entitlement to full benefits from the current 67 to 70.

That’s asking a lot. Americans already work more hours per day, days per week, and weeks per year than their peers in other affluent nations. They averaged 1,811 hours on the job per year, compared to 1,532 hours in the UK, and 1,341 in Germany. Moreover, the U.S. is already an outlier in labor force participation for people over 65. Some 17 percent of Americans work past 65 – double or triple the figure for Western Europe in spite of the fact that Europeans live years longer.

Moreover, not every 70-year-old is healthy enough to work. Work in old age – especially manual labor – can sometimes hasten death and morbidity. Yet millions of Americans over 65 seem to have little choice: one older white worker in four and over 40 percent of older Black and Latino workers toil in physically demanding jobs.

In any event, deciding between work and retirement is not always under workers’ control. Older Americans are often quietly (and sometimes illegally) pushed out of the labor force. Among workers age 55-64, the rate of involuntary retirement is 54 percent, while 45 percent of workers 65 and older are forced out before they choose to exit. These trends are perversely connected: often, older workers are pushed into retirement because deteriorating health reduces their productivity in physically demanding work. 

The system is also stacked against most workers because the rewards for waiting to retire are meager. Due to financial pressures and inadequate retirement savings, many older workers claim Social Security in their 60s while they are working, losing up to 30 percent of the full benefit in their 70s and beyond. Congress did aim to incentivize later retirement by sweetening the pot for those who wait, but low wages have proved a powerful counter-incentive.

Consider, too, that when people must work in old age to supplement otherwise inadequate incomes, they generally have little bargaining power on wages, hours or job security. Workers over age 55 are disproportionately represented in jobs that are lower-paid and physically demanding: Some 31 percent of home-health and personal-care workers and 34 percent of janitors are over 55.

Did I mention that this dreary picture is poised to get drearier? Most of the fastest-growing job categories in the U.S. economy, such as software engineering, require extensive training. And while health care could
absorb vast numbers of semiskilled workers (note to nativists: bar those immigrants at granny’s risk), much of the work is physically taxing and a dubious fit for most people in their 60s and 70s.

What about the argument that people should work longer because they are living longer? It’s true that, when Social Security was created during the Great Depression most Americans lived just a few years into retirement. But this fact is not terribly relevant since current longevity is sharply skewed toward the affluent. In my neighborhood in New York’s Upper East Side, the average income is $121,000 and life expectancy at birth is 84 years. Up the street where my favorite Mexican restaurant is located, the average income is $62,000 and life expectancy is just 66 years.

Who Stole Retirement?

So, what happened to the great American retirement dream? It was battered by a combination of economic trends, the renaissance of Social Darwinism and the survival of the fittest, and a political system that Nobel Laureate Joe Stiglitz calls the survival of the wealthiest. Among the factors: the declining progressivity of Social Security benefits as affluence has increasingly correlated with longevity, and the relentless decline of unions in the face of hostile regulation at both the state and federal levels. But the proximate cause was the mass substitution of 401(k)s and IRAs over pension annuities as the primary retirement savings vehicle.

In 1974, President Gerald Ford signed the Employee Retirement Income Security Act, which among other things created the voluntary self-directed, tax-favored accounts that now constitute the backbone of the private retirement savings system. Many experts at the time recognized that the design was inherently weak if the goal was to get everyone to retirement with adequate savings. But misgivings were brushed aside with a combination of very American enthusiasm for rugged individualism and some heavy-duty lobbying by the finance industry.

Optimists argued that if people straightened up and flew right, they would be fine. All they needed was a cram course in “financial literacy” and a newfound will to delay gratification so that the same folks who borrowed against their credit cards at 30 percent interest would somehow find a way to save enough and to invest it wisely. And if my grandmother had wheels, she’d be a trolley car.

The primary fault of 401(k)s and all comparable tax-favored retirement accounts is that they simply can’t deliver the security that middle- and lower-income households need. In once-common traditional pension plans, aka “defined-benefit” plans, employers put up the money for pensions and invested it on behalf of the participants, bearing the risk if the investment portfolio failed to deliver as expected. Retirees got a monthly check set by contract (sometimes even indexed for inflation) for the rest of their lives.

Now, with retirement savings mostly in private accounts, retirees’ living standards depend on earlier frugality, investment acumen – and luck. Yet what people want most in retirement is a level of income that they can count on for the rest of their lives.

Second, today’s self-managed retirement plans differ fundamentally from old-fashioned pension annuities, where workers are automatically enrolled and employers bear much of
the risk of shortfall during the accumulation phase. With 401(k)s, by contrast, workers voluntarily save through payroll deductions and employers may chip in. In 401(k)-type plans, there are no guarantees. Account values go up one day and down the next depending on the investment portfolio chosen, and where it will end nobody knows.

Third, the system disproportionately subsidizes those who need it least. All account holders get a tax break proportional to their tax brackets, meaning that an exec in, say, the 34 percent bracket, gets twice the benefit per dollar set aside compared to an account holder in the 17 percent bracket. Add in the reality that
employer matching funds are typically proportional to employee deductions. So it should hardly be surprising that some 44 percent of employer contributions to voluntary retirement plans go to the top 20 percent of earners.

The fourth structural flaw of retirement based on individual private accounts is that traditional group pension funds significantly outperform 401(k)s both because traditional pensions are more wisely invested and 401(k) account managers on average skim off higher fees. The drag on growth created by the latter can be considerable. Say a worker contributes $5,000 a year to their 401(k) and earns 9 percent for 40 years. Paying an extra 1 percent annually in fees would reduce the total accumulation by more than half a million dollars!

What Is To Be Done?

There are a host of ways to ensure that Americans have adequate incomes in retirement – everything from making both the taxes and benefits of Social Security more progressive to integrating retirement income into a universal basic income plan that keeps everybody out of poverty. Here, I will outline one key element that I favor, a hybrid between traditional pensions and defined contribution plans that would ensure that the path of least resistance for everyone with a Social Security account is to save more for retirement even as they continue earning Social Security credits.

The proposal, fleshed out in the Retirement Savings for Americans Act, a bill that has some bipartisan support in Congress, would extend a retirement plan modeled after the successful Thrift Savings Plan for federal employees to private-sector workers who don’t have coverage through employer-sponsored plans. In many ways it mirrors 401(k) plans, but features automatic enrollment, portability if you change jobs, diverse, low-fee investment options, efficient ways to distribute accumulations – and a government match up to 5 percent of wages that would phase out gradually for middle-income account holders. The (plausible) goal: an accumulation of $600,000 for a worker making $30,000 a year after 40 years of government-matched contributions.

The current system just gives workers modest financial incentives to do it all themselves, which fits Americans’ enthusiasm to minimize the role of government or paternalistic employers. Everyone knows about the miracle of compound interest and the generally positive impact of diversified investments held for the long term. But the miracle is only realized if you start saving early, resist invitations to earn a quick buck, and don’t take the money out until retirement. The RSAA, by contrast, wouldn’t require workers to luck into a prudent savings path, but it would nudge them in that direction by sweetening the pot with dollar matches and by requiring them to opt out with their eyes open to what they are missing.

America is Number One (Not)

Most other affluent countries have built on traditions of broad social safety nets by including universal public pensions and mandatory savings schemes that ensure adequate security post-retirement. The American pension system, a dog’s breakfast of Social Security supplemented by tax-favored retirement savings and subsidized medical insurance, is weak by comparison. And seemingly getting weaker: It now ranks 22nd out of 47 countries, garnering a barely passable C+ on the Melbourne Mercer Global Pension Index. Indeed, by that index, the U.S. ranks below Kazakhstan in terms of the adequacy of coverage and retirement benefits, financial sustainability, and the integrity of regulatory and governance systems.

The OECD, for its part, reports that the average replacement rate for public pensions in the U.S. is around 49 percent, compared to the OECD average of 63 percent. Some member-states including the Netherlands and Denmark – which incidentally have a lower GDP per capita in terms of purchasing power than the United States – manage replacement rates above 80 percent.

The Costs of Doing Nothing

Our retirement system is, quite frankly, a failure on its face because it asks far too much of ordinary people facing competing demands for their limited financial resources, as well as fundamental uncertainty about the returns to long-term savings or even how much money they will need in retirement to sustain consumption until they die.

Social Security, which is mandatory for almost everyone working and does shift both the risk of return on investment and the risk of outliving retirement savings from individuals to government, is part of the answer. But shoring up Social Security faces the headwinds of policies that have encouraged employers to abandon responsibility for retired workers by dropping once-standard annuitized pensions in return for offering voluntary, self-directed, defined-contribution plans like 401(k)s to workers. And that leaves most Americans badly prepared for retirement.

Without fundamental changes in retirement policy, a significant portion of our rapidly aging population will at best muddle through in the face of financial insecurity. And they won’t be the only losers. Their children, who are raising their own families, will be left with responsibility for parents facing uncertain finances and declining health. Or they
will end up in assisted living paid for by Medicaid – that is, by federal and state taxpayers.

There are political concerns, too. While the causes of the drift toward no-nothing populism are not entirely economic in origin, broad discontent is certainly fed by the insecurity created by our leaky retirement system.

Working ’til you drop is just not a civilized plan for a civilized society.