Home > Library > Stable Times > Volume 5, Issue 4  

The Myth of the Three-Legged Stool

For as long as most Americans can remember, their hope for a financially secure retirement has centered on the dependable "three-legged stool" of Social Security, pensions and personal savings. Yet for most Americans, this three-legged stool has proved to be little more than a myth, says Teresa Ghilarducci, Associate Professor of economics at the University of Notre Dame.

One of the featured speakers at the SVIA Forum, Ghilarducci explained that only a minority of the nation's elderly actually have realistic access to all three of these sources of income. Dividing the senior population into quintiles based on 1998 levels of income, Ghilarducci found that for the bottom three quintiles, Social Security alone accounted for 82.1%, 80.5% and 63.8% of income, respectively. In none of those groups did personal savings account for more than 7.3% of income, and for the poorest group it accounted for less than 1%. What's more, the percentage of retirement income accounted for by Social Security has gone up for every group since 1980, while the percentage of income accounted for by pensions has remained stagnant.

One consequence of these trends, Ghilarducci said, is that people have come to rely on the job market as a fourth source of retirement income. But with the nation on course to enter a recession, she warned, that may not be an option in the near term. In addition to robbing people of the ability to find jobs after retirement, a recession could harm retirees by hobbling the stock market and the returns people earn on their retirement assets.

Compounding the bleak outlook for many retirees, Ghilarducci said, is a trend among employers to shift more and more health care costs onto workers and retirees alike. She attributed this to employers embracing a new employment contract that's steering them away from a model of corporate paternalism toward one of individual responsibility. Unfortunately, she said, that model has limitations. It is attractive in up markets, when it fattens returns in defined contribution plans, but less so in down markets. It is similarly attractive when older workers can easily find jobs, but less so when the labor market becomes soft.

"This recession is going to be very different," Ghilarducci concluded, because "never before have so many Americans had so much control over their retirement savings."

If the "individual responsibility" model can't deliver retirement security, she added, the government will have to provide basic benefits. Other measures that could help, she said, would include the creation of multiple-employer benefit plans that would make it easier for small employers to offer retirement benefits (akin to the system that now exists for various trade unions), and rewarding employers in some way for paternalistic behavior.

Read Next: One Man's Approach to Social Security Reform