California is facing an unprecedented retirement crisis. According to a recent Wells Fargo study, more than one-third of us say we won’t ever be able to afford to retire, staying on our jobs until we’re too sick or die. Four in 10 of us currently in the workforce say we can’t afford to pay the bills and put any money aside for retirement.
The recession is partially to blame. But there’s another villain that’s ducking responsibility for the erosion of middle-class retirement security: Wall Street.
About 30 years ago, brokerage houses rolled out a new financial product for private employers called “defined contribution” plans, better known as 401(k)s. Unlike “defined benefit” plans that required employers to pick up most of the cost and provided workers with a guaranteed payment, 401(k)s required workers to invest money from their own paychecks (sometimes with a contribution from the employer). Under these plans, employees are left to make their own decisions about which Wall Street options in which to invest: What you end up with depends on how the investments you pick performed.
So it’s easy to see why Wall Street pushes these plans aggressively: 401(k)s come with high fees that boost the profits of financial services firms. And the returns on these accounts are much lower than traditional “defined benefit” plans, which have a guaranteed payment defined by a set formula (how long you worked, your age, etc.) and whose investments are guided by financial experts.
When the stock market cratered in 2008, middle-class Americans lost trillions of dollars in their IRAs, crushing their dreams of a secure retirement. Even though the recent economic rebound has boosted the balances in many of these accounts, a HelloWallet survey found that the average older worker with a 401(k) plan has only about two years of replacement income saved – about 15 years short of the median lifespan post-retirement. Yet Wall Street continues to hawk these plans even though the likes of John Bogle, founder of the Vanguard Group with its $2 trillion in assets, recently noted that the 401(k)s was “designed as a thrift plan, and it doesn’t work as a retirement plan.”
That’s why it’s troubling – but not surprising – that Wall Street is behind a ballot measure being peddled by San Jose Mayor Chuck Reed that threatens to exacerbate our retirement crisis. Although it’s being billed as a solution to municipal financial challenges by a mayor, it’s being bankrolled by a pair of hedge fund managers and Texas billionaire and former Enron trader John Arnold, all of whom have done well by Wall Street.
This “reform” measure not only seeks to reduce the benefits for new employees, but also will slash retirement payouts to many of us in the middle of our careers. For teachers like me, Mayor Reed’s proposal would be devastating. It doesn’t just reduce vested retirement benefits – it allows them to be eliminated.
Perhaps Mayor Reed doesn’t know that we do not receive Social Security. Or that most of us don’t receive health benefits from our employers in retirement. Our pensions are our safety net. There’s nothing else.
What’s more, slashing our retirement benefits will hurt California’s economy. Retired teachers not only volunteer in schools and throughout our communities, but also support our community’s financial health.
According to a report by the Business Forecasting Center of the University of the Pacific Eberhardt School of Business, retirement payments by CalSTRS (the teachers’ retirement fund) generated $11 billion in economic activity, supported 92,000 jobs and created $1.2 billion in tax payments to state and local governments last year.
Rather than accelerating the shredding of our state’s retirement safety net, Mayor Reed should put his political energy into ensuring retirement security for all Californians. That would be an achievement of which he and other politicians could be proud.
Maggie Ellis is chair of the California Teachers Association Retirement Committee and a teacher in the Elk Grove Unified School District.