Poof! There Goes the American Retirement Dream…Again

Seth J. Masters

When it comes to planning for retirement, we’ve been setting US workers up to fail.

From Social Security to pension plans to defined contribution (DC), Americans keep aiming to build a better mousetrap, only to find it sprung on themselves.

When we want so badly for this to go right, why do we keep getting it wrong?

We haven’t asked that question lightly. At its core are the principles for designing a better model for retirement planning—one that is inherently more flexible and more adaptable to future needs, and that successfully honors the social contract that lies at its heart.

Flying Lessons: Social Security and Defined Benefit

The earliest retirement systems were pay-as-you-go plans such as Social Security. Underpinning such plans is an implicit social contract: if you live a long time, your country will take care of you.

That has been a wildly popular idea—so popular that any politician who has tried to put the brakes on Social Security has been voted out of office. When Otto von Bismarck introduced the first of such plans in the 1870s in what is now Germany, average life expectancy was a little under 50; benefits kicked in at age 70. It was a sustainable system, but it didn’t benefit many people.

But 70 years old today is about equal to 46 in the days of Bismarck. And if you’re part of a couple living in the US, there’s a 50-50 chance one of you will live past the age of 92. There’s a one in five chance one of you will live to 100.

Longevity risk has reached crisis proportions for Social Security. In combination with generational demographics, this means that there are more and more retirees being funded by fewer and fewer working-age people. In a pay-as-you-go system, that’s unsustainable.

The social contract in defined benefit (DB) is a bit different: in exchange for working for a stretch, your employer will take care of you with a pension after you retire. The pros to DB are the same as the pay-as-you-go system—it provides income for life, and it pools risks.

The cons? For one, you can’t take it with you. For Grandpa’s generation, that wasn’t considered a drawback, but modern-day employees do not spend their entire lives with one company.

In addition, DB funding is very procyclical: it’s most required at those exact times when the plan sponsors are least able to afford it. That is a serious structural flaw.

And that’s where the DC story starts.

The Vanishing Social Contract: DC 1.0

Defined contribution began as a supplement to DB—giving employees an option to do something on top of their other retirement plans. But it’s now Americans’ primary retirement savings vehicle.

There’s a lot to like about the DC system in its 1.0 incarnation. It is portable; it doesn’t lock employees to an employer. It’s also pretty low-cost and low-risk to plan sponsors, though not necessarily low-cost to participants.

But there are some huge cons that have held DC back. The first is that the outcomes participants have been able to achieve by deciding on their own whether to participate and how to invest have not been adequate to fund a dignified retirement.

Not even close.

Because my 401(k) is for me—it’s my money and it’s for my life—I don’t benefit from risk pooling. The investment problem of figuring out how much I need to retire on is therefore “my problem”: and it’s an even more complex problem than a DB sponsor faces.

To assume that every participant in America is going to figure out his or her own solution to this problem—when it’s incredibly hard for someone like me, who spends my whole career trying to figure out answers to these kinds of problems—is simply…wrong. As well-intentioned as it might be, freedom of choice is setting employees up to fail.

The result has been that DC 1.0 isn’t a social contract.

That’s what we all, collectively, must change.

Next week, I’ll share with you our vision for a better future that will restore confidence in retirement for American workers. Because I am optimistic that a bright future lies ahead. Indeed, change is already afoot.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.


  1. Thomas Rekdal

    So far, very persuasive. This is quite a teaser. You have me hooked on the next installment.

  2. owen shuler

    The issue since ERISA came into being is in the false sense of confidence institutional modeling has experienced in pushing quant and other algorithmic based products into the pension sector. To many “advisors” chasing other peoples money with sales pitches that excluded sound practical or long term investing logic. If investment advisors became risk managers again placing risk premia on direct investments into companies without all the layers of siphoning off that occurs now that “smart” people are the decision makers for the poor guy who happens to have his retirement invested in one of the “accepted” (because lobbyists bribed the politicians) mechanisms for retaining and investing ahead of inflationary demands of cash down the road, we could start to replace some of the lost trillions that was stollen form our ERISA depositors.

    As an entrepreneur with several interests in different sectors and every one a special situation we entered as a result of an institutionally guided inefficient capital structure, I can tell anyone who will listen about the inerrant and incompetent methods employed by financial engineers using others peoples money. The solution is not another spin on the current system, it is an adoption of an equity based investment model with direct owned equity in emerging and middle markets companies led by seasoned entrepreneurial managers with FINRA like oversight. “Protecting” the masses from the bad actors was the intent of the SEC, FINRA, Glass Steagall, but how has that gone? Its time to simplify the direct investment process and reduce the advisor class to a third its current count through investment driven tax strategies not income and consumption driven products.

    To the point of figuring out how much money a client needs for retirement and then targeting that figure with what is available did not work therefore lets try building a systemic infrastructure for increasing pension capital through responsible investing in hard assets, small companies and growth without so much “Load” that the pensioner never stands a chance of seeing his money again much less building a nest egg to the latter years.

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