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1 September 2015 Financial Analysts Journal Book Review

Falling Short: The Coming Retirement Crisis and What to Do about It (a review)

  1. Martin S. Fridson, CFA

Focusing on the defined contribution piece of the impending retirement crisis, the authors recommend several actions, including automatic enrollment in 401(k)s and the government’s shoring up Social Security. For employees, two key steps are to start saving early and to delay retirement. This book furnishes both the motivation and the know-how to help them succeed.

As of 2013, report the authors of this concise, powerful book, the median household approaching retirement had only $111,000 in 401(k)/IRA holdings. Withdrawing 4% annually—a level recommended by many financial advisers in order to avoid running out of money—produces a mere $4,500 of annual income. Nonretirement financial assets will not provide much of a cushion: they recently totaled just $12,500 for the average household in the 55–64 age bracket.

These stark statistics show that although countless other books’ titles proclaim an impending crisis,1 in this case the warning is not hyperbole. Even more disturbingly,  Falling Short: The Coming Retirement Crisis and What to Do about It  deals only with workers whose retirement income will depend on defined contribution plans, which are now the predominant form of retirement funding in the United States. Defined benefit plans have gone out of fashion, yet 1.5 million Americans are enrolled in multiemployer pension plans that could be in jeopardy given that backup by the Pension Benefit Guaranty Corporation (PBGC) is in doubt. The agency itself has said, “Some multiemployer plans are deteriorating and PBGC’s multiemployer program is more likely than not to run out of money within the next eight years.”2  As for the public sector, the Congressional Budget Office has stated, “By any measure, nearly all state and local pension plans are underfunded.”3

Focusing on the defined contribution piece of the problem, Greenwich Associates founder Charles Ellis, Boston College professor Alicia Munnell, and Andrew Eschtruth of Boston College’s Center for Retirement Research make recommendations that, if adopted, would meaningfully move the United States toward a solution. For employees, two key steps are to start saving early and to delay retirement. The authors calculate that starting to save at 25 and retiring at 70 instead of starting to save at 45 and retiring at 62 reduces the required annual savings rate by a factor of 10. Employers can increase participation in 401(k) plans through automatic enrollment, with an opt-out for employees rather than the opt-in arrangement still in place at many companies. The government can help by shoring up Social Security through such means as investing a portion of the trust fund in equities and shifting the system’s legacy costs 4  from the payroll tax to the income tax.

Participants in defined contribution plans must not only save adequately but also invest intelligently. Ellis complements his coauthors’ expertise in retirement funding with his vast store of knowledge about investors’ self-defeating behavior. A case in point: buying at the top and selling at the bottom cuts the average investor’s long-term return by approximately one-third. Readers of  Falling Short  can also profit by understanding the critical importance of investment costs. Over a 40-year span, additional fees totaling just 1 percentage point reduce assets at retirement by about 20%.

Encouragingly, politicians appear to be starting to recognize that they will eventually face a gargantuan blowback if they fail to address the coming retirement crisis. In January 2015, Illinois governor Pat Quinn signed into law a bill mandating that beginning in 2017, most working residents of the state who do not already have employer-based retirement plans will be automatically enrolled (with an opt-out provision) in individual retirement accounts funded by a 3% deduction from their paychecks.

Illinois’s program, dubbed “Secure Choice,” is no panacea. For one thing, it exempts businesses with fewer than 25 employees. Furthermore, 3% is too low a savings rate to replace 75% of employment income during retirement, the goal around which Ellis, Munnell, and Eschtruth structure their analysis. Even a worker who begins saving at 25 and works until 70 needs to put aside 5% every year, according to their calculations. If that worker plans to retire at 65, the required savings rate rises to 12%. (Note that Secure Choice allows participants to save more than 3% if they wish.)

Still, the fact that legislators are beginning to deal with the problem represents progress. In the post–defined benefit era, future retirees must take an active role and exercise considerable self-control to ensure a comfortable retirement. Falling Short furnishes both the motivation and the know-how to help them succeed.


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