Tax breaks for 401(k) plans amounted to $110 billion in 2006, most of which went to households in the top tax brackets.
As a result, 401(k) plans and other defined-contribution plans 1 that were designed to supplement, not replace, traditional pensions are growing at the expense of defined-benefit plans that provide secure supplemental income to Social Security. Regulations favor, and tax subsidies increasingly go to, the wrong kinds of retirement programs. This reversal is due to tax and regulatory policies that fail to promote retirement savings and penalize defined-benefit plans. This will be the first time since World War II that the standard of living of elderly Americans declines while that of prime- age workers increases.
If current trends continue, poverty rates among the elderly will increase and middle-class retirees will find that their retirement income will not pay for the lifestyle they achieved while working.
For most of the last century, American retirement income policy supported a combination of programs-Social Security and federal tax subsidies for traditional defined-benefit pensions and for voluntary personal retirement accounts-that enabled many people to stop working and to maintain their living standards in retirement, while reducing old-age poverty rates.īut the American retirement income security system is breaking down.
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