Munnell is director of the Center for Retirement Research at Boston College and Peter F. Drucker Professor of Management Sciences at Boston College's Carroll School of Management.
Improving Americans’ retirement security requires a three-pronged approach: work longer, preserve Social Security and save more.
The most potent lever would entail people working a few years longer –- until their late 60s, on average. Monthly benefits received at age 70 are 76 percent higher than those received at age 62. Those extra working years also allow workers to avoid tapping their 401(k)s, earn additional interest on those balances and make further contributions. Finally, additional years of work shorten the period over which households must stretch their retirement nest eggs.
In addition to working longer, we need to maintain Social Security as the base of support. With the extension of the retirement age already taking place, the replacement rate -- benefits as a percent of preretirement earnings -- for the average earner at 65 will decline to 36 percent. Once the trust fund is exhausted in the early 2030s, the program will be able to pay only three-quarters of that amount, a level not seen since the 1950s. Clearly the program needs an infusion of revenue.
Finally, everyone will need retirement savings in addition to Social Security. This need cannot be met by a voluntary employer-based system. The nation requires a new, mandatory tier of retirement accounts -- initiated by the federal government but managed by the private sector -- that will replace about 20 percent of preretirement earnings. On top of this new tier, the 401(k) system needs to be fixed so it can return to its original purpose of providing supplementary income to middle and high earners. Fixes include making auto-enrollment (and auto-escalation of default contribution rates) mandatory, clamping down on leakages, controlling fees and facilitating the drawdown of assets.