In an article earlier this week, Mr. John Bogle, founder of the Vanguard Group, decreed that America’s current retirement system is broken. As far as a fix, he offers only two suggestions. The first is to increase the current level of taxable income subject to Social Security taxes to $140,000-$150,000. The second is a reduction in the automatic cost of living adjustments that are used to calculate benefits.
While both would generate significant increases and savings to Social Security, they do not address the larger issues with our retirement system. As Bogle notes, the three pillars of retirement are Social Security, Defined Benefit plans and Defined Contribution plans—and they are in bad shape. In order for defined contributions plans to work better, we need to continue to automate as much of the functionality as possible, incentivize larger contributions, and make sure that an appropriate investment option is selected based on the participants age and realistic expectations about goals and markets.
Here is some food for thought. What if you could earn an additional tax credit by deferring at least 10% of salary or not having a loan against your 401(k)? What if an employer gave one additional vacation day per year if a company-wide goal of participation and contribution was reached? Ultimately, the system can work, but we need to continue to innovate and provide fresh ideas.
Click here to read more on John Bogle’s comments.