WASHINGTON — As millions of people watched their 401(k) retirement plans rise and fall this week along with the stock markets, their fears reflect a sweeping revolution in how Americans save for retirement.
Whether it's disappearing work-based health care, the move from traditional pensions to 401(k)s, the push to privatize Social Security or just making it harder to file for personal bankruptcy, these and other social supports and safety nets that were designed to make Americans more secure have been watered down, abandoned or altered so that individuals bear a greater share of the risk and cost.
"What's happening on Wall Street occurs alongside a very substantial slow-moving crisis for American families," said Jacob Hacker, a political science professor at the University of California at Berkeley. "More and more financial responsibility and risk have moved from the broad shoulders of government and corporations onto the backs of America workers and their families."
Hacker said this week's stock-market roller coaster offers several important lessons about the consequences of this trend, which he chronicled in his 2006 book, "The Great Risk Shift."
When 401(k)s replaced defined-benefit pension plans as workers' primary retirement savings vehicle, employers were ecstatic because the plans were cheaper to fund and administer than traditional pension plans are.
All but gone are the days when employers and trustees made investment decisions and assumed all the risks for pension plans that pay workers a set amount each month for the rest of their lives.
With 401(k)s, those payments are neither guaranteed nor assured, and investment responsibilities now lie with individual workers, many of whom know little or nothing about investing.
"That gets people in trouble because they don't really understand a single stock is riskier than an index fund or that holding stocks in the company you work for is more risky than an index fund," said Alicia Munnell, the director of the Center for Retirement Research at Boston College.
Participant inertia is another problem. A 2005 study of more than 1 million 401(k) plan participants found that 80 percent made no trades and only 10 percent made only one trade in a two-year period.
These factors, the decline in home values and the current stock market losses help explain why more than half of working households probably won't be able to maintain their current standard of living in retirement, Munnell said.
And for older workers who want to retire now while unemployment is high and jobs are scarce, the recent market losses will cause many to remain in their jobs until they can recoup their losses.
"This will just make the recession worse because it will force people to stay in the labor market and cling to their jobs. The 401(k) has destabilized the economy because of these perverse employment effects," said Teresa Guilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York.
Not everyone agrees, however. Daniel Mitchell, a senior fellow at the Cato Institute, a libertarian think tank, doesn't pine for the old pension plans. He said they were riskier than individual accounts because companies often underfunded them and sometimes went bankrupt, which sent aggrieved pension holders to the Pension Benefit Guaranty Corp. to seek reimbursement.
At least with 401(k)s and IRAs, individuals can control their money, Mitchell said.
"You might not make the wisest investment or your fund adviser might not make the wisest investment, but at least you're in a comfortable position knowing the whole thing won't go belly up," Mitchell said.
Mitchell's sentiment is the same one that helped foster the "personal responsibility" and "ownership society" movements, both of which, Hacker said, helped lay the groundwork for putting more financial responsibility, and risk, on individuals.
"I do not want my retirement savings relying on the integrity of the political class. I'd rather have it in the financial markets," Mitchell said, adding that the "political class" is the "politicians and bureaucrats who have tremendous power over me if I'm in a shaky pension plan."
That wasn't always the prevailing philosophy, Hacker said. The Great Depression and World War II created a massive push for government involvement in the well being of citizens. But the political upheaval of the 1960s and the economic malaise of the 1970s gave way to Ronald Reagan, who preached that government wasn't the solution to our problems, but was the problem.
However, with the economy facing its greatest challenge since the Great Depression, the business community and individuals clamoring for universal health care, the national sentiment may be more receptive to the old social compact in which government takes a larger role in providing for the well being of its citizens.
"This current financial crisis has really drawn into sharp focus the idea of risk," Hacker said. "Now that we're thinking about risk, I think it really calls on us to think beyond the current crisis and to the broader challenges we face as a society."
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