J. D. Heyes
February 17, 2013
Is chronic, slow economic growth and rising poverty the new normal for America and Americans? Unfortunately, for an increasing number of people, the answer is yes.
According to recent reports, a large and growing portion of American workers who are having trouble making ends meet because of rising costs are being forced to raid their retirement accounts for non-retirement needs, “raising broad questions about the effectiveness of one of the most important savings vehicles for old age,” The Boston Globe said.
In fact, more than one in four – a staggering 25 percent of workers – with 401(k) and similar retirement savings accounts are now using them to pay current bills, new data indicates.
The monetary figure is alarming: A quarter of the $293 billion deposited in such accounts each year is now being drained via loans, withdrawals and out-right cash-outs, “undermining already shaky retirement security for millions of Americans,” the paper said.
The new normal – Faltering finances
What’s worse is that the federal government is broke, too; the country is already trillions of dollars in debt and tens of trillions in the hole for unfunded promises made over the years by pandering politicians who have mortgaged the future of generations of Americans to buy votes today.
Because of their irresponsibility, policymakers will now have to cut the Social Security and Medicare benefits at some point – benefits that millions of Americans who paid into both systems were counting on to make it through retirement. Couple this eventuality with sustained low economic growth, poor employment prospects, stagnating pay scales and rising costs of food, fuel and utilities, and it is easy to see how more Americans will eventually be forced to mortgage their future.
“We’re going from bad to worse,” Diane Oakley, executive director of the National Institute on Retirement Security, told the Globe. “Already, fewer private-sector workers have access to stable pension plans. And the savings in individual retirement savings accounts like 401(k) plans – which already are severely underfunded – continue to leak out at a high rate.”
Financial advisory firm HelloWallet released a report in January stating that more than one in four workers has been forced to dip into retirement funds to make house payments, settle credit card debt and other bills. The firm said workers in their 40s were most likely to dip; of that group, one-third are raiding retirement funds.
New data from Vanguard, one of the country’s biggest 401(k) managers, show an increase of 12 percent in the number for working Americans who either took out loans against their retirement accounts or withdrew money from them outright since 2008.
Firms say the most common way Americans raid is through loans which must then be repaid with interest. Also, anyone who withdraws money from accounts early pays a significant penalty; in most cases, that is in the form of a 10 percent federal tax penalty, but those workers will also pay capital gains taxes, which are substantial.
“The costs are financially harmful to families, but money-management firms reap massive fees,” the Globe reported.
What’s more, employers are getting shafted in a sense: Those who subsidize worker contributions with matching funds are doing so under the assumption they are helping workers secure their retirements.
You may not know it yet, but your future has already been mortgaged
“I don’t think this can be ignored. Employers are dramatically overpaying for retirement, but it is not benefiting the employee,” Matt Fellowes, a former Brookings Institution researcher who is now chief executive of HelloWallet, told the Globe. “In many cases, the only one benefiting is the vendor.”
Since 401(k) retirement accounts were created by Congress in 1978, traditional employer-provided pensions have declined, leaving the former as the primary retirement funding vehicle. But as the economy continues to under-perform and inflationary pressures grow, more workers will be forced to raid retirement funds for their future in order to make ends meet today.
“401(k)s are not being used for retirement by a large and growing share of workers because they are misaligned with the very basic financial problems most workers face and must address,” Fellowes added.
Welcome to America in collapse, brought to you by a self-serving political class and paid for with your future.
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