Sorry Suze, We Aren't to Blame for Our Retirement Shortfall

Suze Orman's admonishment that not enough of us are saving enough for retirement misses the mark. While many of us live beyond our means, for the most part our retirement shortfall isn't due to bad savings habits but the fact that we have one of the stingiest retirement systems in the advanced world.

The ability to retire isn't dependent on a "multitude of financial decisions" as Orman contends but how generous your employer or your government is. According to the OECD (purchase required) the U.S. ranks near the bottom of the 30 member countries in pension generosity. Only six of the member countries had lower pension wealth than the U.S.: the Czech Republic, Hungary, Mexico, Poland, the Slovak Republic and Turkey.

As I explain in detail in my book, one of the factors driving America's pension poverty is shrinking pension coverage: only about 13% of the population is covered by one, compared to 44% in the mid-1970s. The "pretend pension" known as a 401(k) plan was never intended to create retirement security but act as a supplement to a regular pension because of the puny employer contribution rate of 3% of pay. Seven of the eight countries that have mandatory 401(k) style plan are more generous than ours; the average employer contribution rate is 7.25% of pay. Finally, when it comes to Social Security, we're downright insecure: while Luxembourg, the Netherlands and Greece offer generous safety nets, the U.K and the U.S. are among the least generous, offering only around two-thirds of the average benefit for OECD countries.

When I was asked to testify before the Department of Labor on financial literacy in 2007, I decided to figure out what savings rates employees should be advised on based on the age they started saving because the earlier you start the less you have to save. With the input of pension actuary James E. Turpin of the Turpin Consulting Group, I testified that even the tiny minority of participants who are savvy enough to start contributing at age 25 must save 10% of their salary to build an adequate nest egg by age 65. Waiting until age 35 increases the contribution rate to more than 17%, waiting until age 40 increases it to more than 23% and postponing saving to age 50 requires nearly a five-fold increase from the rate at age 25, to 48% of pay. Needless to say, this over-50 requirement flies in the face of the meager current $5,500 limit on "catch-up contributions" currently allowed by the IRS. Given that most Americans wait until their 30s to contribute and only sock away around 7% of pay, most of them are up a creek with an inadequate paddle.

Bottom line: sure, many of us are guilty of bad savings habits. But bankrolling one's own retirement is a concept that's unheard of in most of the rest of the advanced world. If you agree that we need to mandate higher employer contributions, please go to my website: www.retirement-solutions.us and email the link on the upper right hand side, "Stop the 401(k) Nightmare," to your Congressperson.