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Our "Ridiculous" Retirement System Is Crumbling, Expert Says

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Over the years, I've watched economics professor Teresa Ghilarducci try her mightiest to nudge lawmakers to make over and strengthen our retirement system before the tidal wave of boomers leave their jobs for good.

At Capitol Hill hearings and at retirement policy conferences, Ghilarducci has offered her own proposals, along with those of other policy experts, designed to help Americans retire with adequate income and without risk. Because this system of relying on our 401(k)s to last us through 20 or 30 years or more in retirement  isn't just "ridiculous,"  she says in a New York Times op-ed column,  it has failed us miserably.

Our 401(k)s, for those of us fortunate enough to have one, are tied to an unpredictable and often volatile stock market. (Some employers did away with their  401(k)s at the height of the recession to save money or stay afloat). If  the recession has taught us anything, we now know that retiring in a down market with lost income -- despite years of scrimping and saving, of choosing investments and allocations wisely -- will diminish our lifestyle permanently. And that's when we get it "right" and save for 40 years or more.

For many of us, there are no traditional pension plans with guaranteed monthly income to fall back on. And Lord help us if the housing crisis drained the equity out of our homes. A recent AARP report found that millions of older adults  lost their homes, or struggle to hold onto their homes, during and after the foreclosure crisis.

Workers increasingly have been shouldering the burden of funding their own retirement for a generation now. This do-it-yourself retirement system of 401(k) and IRA plans is like pulling your own teeth rather than using a dentist, Ghilarducci says, or like doing your own electrical wiring instead of hiring an electrician. Risk and mayhem lurks at every corner.

Here's what would have to happen for the retirement model to work for you: First, figure out when you and your spouse will be laid off or be too sick to work, she says. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. Fourth, earn at least 3 percent above inflation on your investments every year. Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

Her proposal to shore up the system in brief: allow private sector workers to enroll in professionally managed state-operated retirement programs. In a previous  New York Times column, she put it this way:

"Public pension plans usually outperform 401(k) plans and individual retirement accounts, because instead of a single worker managing a single account, large institutional plans pool workers of all ages, diversify the portfolio over longer time periods, use the best professional managers that aren't available for retail accounts and have the bargaining power to lower fees and prioritize long-term investment. By some estimates, costs for public pensions are over 45 percent lower than for individual 401(k) plans. Opening up public pension options to everyone is a cheap, simple way to help."

Boomers and older adults need that help more than ever. Some 75 percent of Americans nearing retirement age in 2010 had  less than $30,000 in their retirement accounts. Almost half of middle-income workers, 49 percent, will be poor or near poor in retirement.

It means millions of people will rely solely on Social Security.

She says it's irresponsible for Congress to deny that the retirement system, despite its tax breaks, defies human behavior. Basing a system on people's voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs.

So refashioning our retirement system and making sure retirees have guaranteed income is a must.

You don't like mandates? Get real, she says. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster.

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