Do-It-Yourself Retirement

The burden of funding one's later years has shifted irrevocably

Mention retirement, and many people dreamily imagine quiet days on the golf course or long walks on the beach. But as the burden of assuring retirement security is increasingly shifted from employers and the government onto the backs of workers, a far less tranquil picture is emerging (page 100). Millions of baby boomers are financially unprepared as they approach traditional retirement age. A staggering half of households headed by 50-to-59-year-olds have $10,000 or less in their 401(k) accounts, for instance, even as public and employer retirement benefits are being trimmed. To avoid a crisis, government, businesses, and employees must make critical choices in the coming years.

Washington's role in all this is smaller than many people think. That's because the feds already have approved a host of tax-advantaged retirement savings products, such as individual retirement accounts, 401(k)-type savings plans, and annuities. Across-the-board expansion of such incentives usually results in more-affluent workers shifting existing savings from taxable accounts into new tax-advantaged accounts -- costing the Treasury billions in lost revenues without spurring much new saving. So federal efforts to boost retirement savings should target poor and working-class households, which have lower savings rates.

To do this the Bush Administration would be wise to note the encouraging results of a recent H&R Block-sponsored study that found IRA use skyrocketed when the contributions of low- and moderate-income taxpayers were matched at varying percentage levels. When such taxpayers were not offered matching payments, only 3% contributed to an IRA. When a 50% IRA match was offered, the participation rate jumped more than fivefold, to 17%. The cost to the Treasury would be only about $15 billion -- 10% of what it currently costs the government to subsidize the retirement savings accounts of mostly middle- and upper-class taxpayers -- yet it could jump-start retirement saving among millions of people who need it most. The Treasury also should consider allowing income tax refunds to be split between two accounts, enabling a taxpayer to deposit a portion into a bank account and the rest directly into an IRA or other retirement savings account -- a low-cost fix.

Still, government action is only part of the solution. Companies must expand the use of so-called automatic 401(k) plans, which enroll employees in retirement savings plans unless they opt out. This approach, used by about a quarter of large companies, including J.C. Penney (JCP ) Corp. and IBM (IBM ), typically boosts 401(k) participation by new workers more than 50%. Participation rates and contribution amounts also jump when businesses offer more investment help for often-confused workers. Next, financial-services companies must do a better job of creating retirement and long-term care products that have cheaper fees and are easier to understand.

Finally, workers must accept that the era of employer paternalism is over -- and the demise of nanny government may not be far behind. So relying solely on Social Security, Medicare, and a company pension for retirement security is risky at best. The smarter, safer approach is to plan for a future wherein retirees work longer, pay more for medical and long-term care, and receive lower Social Security and pension payments than previous generations did. This tough new retirement reality won't be a stroll down the beach. But if workers aren't prepared for the worst, their retirement years may turn out to be anything but golden.

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