The shift from defined benefit to defined contribution plans has created opportunities but also responsibilities for financing retirement that have proven to be a challenge to many households, according to a report from the Brookings Institution.
Defined benefit programs have been eroded nearly everywhere except for the public sector, to be replaced–if at all–with defined contribution programs such as 401(k)s, it noted. In the federal government, the shift has not been as strong since the FERS system, while including the TSP as a major element of the benefits package, does include a defined benefit–but one that is only about half as valuable as the CSRS system.
But even as they are more responsible for financing their own retirement, many retirement-age households “have very low levels of financial assets and are therefore reliant on Social Security and are compelled to work beyond the age at which they hoped to retire. The problems of this group are serious,” it said.
“Households that have been able to save in retirement accounts also face serious challenges … The de facto retirement paradigm has become to save as much as possible and hope you don’t live too long,” it said.
One issue, it said, is defining what is “enough” to retire on. This involves not only decisions on how much to save during a working career but how to invest those savings. “Over the long run, it’s true that equities have provided much higher returns than bonds, but savers have to make sure they have the stomach for the risks involved,” it said. “Navigating financial market decisions is hard even for those with experience and can be bewildering for those who do not follow markets.”
Similarly difficult decisions must be made after retirement, regarding how to draw on assets so that they fund a comfortable lifestyle while preserving enough for the future, it said.