By Michael A. Fletcher
The Washington Post
WASHINGTON — A majority of Americans with 401(k)-type savings accounts are accumulating debt faster than they are setting aside money for retirement, further undermining the nation's troubled system for old-age saving, a new report has found.
Three in five workers with defined contribution accounts are "debt savers," according to the report released Thursday, meaning their increasing mortgages, credit card balances and installment loans are outpacing the amount of money they are able to save for retirement.
The imbalance is expanding even as policy makers are encouraging people to set aside more by offering generous tax breaks and automatically enrolling workers in retirement accounts that in some cases automatically escalate the amount of money over time.
Currently, workers with retirement savings accounts put aside more than 11 percent of their pay for retirement — 5 percent in their own accounts, and 6.2 percent in Social Security.
Despite that — and despite the $2.5 trillion the report says employers have poured into defined contribution accounts from 1992 to 2012 — the retirement readiness of most Americans has been slipping, according to the report by HelloWallet, a District of Columbia firm that offers technology-based financial advice to workers and conducts research of economic behavior.
"Policy has tunnel vision. It tends to tackle problems on a piecemeal basis. The impact of policy on consumer finances is a bit like playing a game of Whac-A-Mole," said Matt Fellowes, founder and chief executive of HelloWallet and a former Brookings Institution scholar. "We raised the victory flag as people increased retirement contributions, but in reality the ability of people to retire is a function of lots of different variables, most important of which is what they are doing on the other side of the ledger."
The HelloWallet report is the latest in an expanding line of research suggesting that the United States is facing a looming retirement security crisis. A growing number of researchers are concerned that the nation is on the cusp of a shift in which more Americans are on a track that will lead to a decline in their living standards when they retire.
The report says that debt is among the biggest culprits. The amount of money that households nearing retirement are dedicating to pay down debts has increased 69 percent over the past two decades, the report said. Households headed by people ages 55 to 64 now spend 22 cents of each dollar to pay off old loans — about the same percentage as younger people, the report found.
The problem is not confined to the poorest Americans, many of whom have no retirement savings. Most of the people with accounts who are accumulating debt faster than retirement savings are older than 40, college educated and earning more than $50,000 a year, the report said.
More than a third of them, the report said, are older than 50, a time when financial planners say people should be paying down debt and increasing their efforts to prepare for retirement.
"My work confirms that people are reaching the threshold of retirement much more in debt than in the past," said Olivia Mitchell, professor of economics and executive director of the Pension Research Council at the University of Pennsylvania's Wharton School of Business.
Mitchell said the main reasons for the growing debt appear to be greater spending on housing, larger and more auto loans, and more credit card debt.
Representatives of mutual fund companies, which manage much of the nation's estimated $4.5 trillion in defined contribution accounts, have long argued that 401(k)s are good retirement vehicles — provided workers save consistently and in large enough amounts, do not raid their retirement money or current expenses, and make wise investment choices.
Not only are relatively few people doing those things, but retirement account managers acknowledge that this traditional advice overlooks a crucial part of the picture: People must pay attention to how much debt they are accumulating in the years before retirement.
"Individuals should consider their full balance sheet and financial picture, which for many households may mean saving for retirement through a 401(k) plan while also paying down student loans, taking out a mortgage to buy a house, or borrowing to send their children to college," said Mike McNamee, chief public communications officer for the Investment Company Institute, which represents mutual funds that manage half the assets in 401(k)s and IRAs.
Citing the decline in traditional fixed-benefit pensions and the inability of many Americans to save adequately in 401(k)-type accounts, some advocates are calling on the federal government to bolster Social Security benefits or to create a new form of retirement help for future retirees.
But other policy-makers are worried about the nation's long-term debt, leaving them more concerned about finding ways to trim Social Security and other retirement benefits rather than increase them.
Fellowes, the HelloWallet founder, said his research tracked worker behavior before the recession, when many people were blithely taking on debt, and during the years after, when many Americans were working to repair their balance sheets. The report relied heavily on data from the Census Bureau's Survey of Income and Program Participation as well as the Federal Reserve's Survey of Consumer Finances.
Mitchell, the Wharton professor, said the debt problem probably would be worse if people were not being encouraged to save for retirement. "Without automatic enrollment in retirement plans, many people would have been deeper in debt and probably facing larger retirement shortfalls than they would have without those automatic saving mechanisms in place," she said.