What would retirement look like if Americans could take early "hardship withdrawals" from Social Security?
This was the topic of conversation in our office the other day -- yes, we have in depth water cooler discussions about retirement policy. Heck, we have in depth water cooler discussions about payroll sometimes. We're a fun group!
Chaos, was our consensus. That, and a return to 1920's style "poor houses". Lots more 80-year-old parents living with their 60-year-old children.
We see it every day with 401k's. An employee has a short-term crisis, and their 401k is the nearest piggy bank that they reach to. This, in spite of the fact that they were saving for retirement, and that they lose almost half the money in taxes and penalties. The withdrawal fixes the "right now" problem, and the "paying for retirement" problem is a long way in the future.
Luckily, even the employees who deplete their 401k's before retirement have Social Security as a very low safety net.
Employers don't really have a vested interest in this. Personally, we'd like to see our employees make good long-term decisions, but we won't be in the picture anymore when our employees retire. A retiree may say "I wish I hadn't pulled money out of my 401k all those years ago", but they probably won't say "I wish HR hadn't let me pull money out of my 401k all those years ago." We can give a gentle nudge that an employee may want to save this money for later, but we gain nothing by standing in their way.
As citizens, though, depleted retirement accounts are going to become everyone's problem. No one thinks that Social Security is enough to retire on all by itself. However, the more people who tap out their 401ks -- or don't have any in the first place! -- the more cost society as a whole bears. Poverty programs, homelessness, lost time to care for elderly parents -- these costs all get borne by society as a whole, as we look for solutions to the problems we see in front of us.
So my question for the collective minds here is this: What public purpose is served by allowing early withdrawals of 401k funds? If regulators changed these plans into a one-way account, where money only comes out on death or age 55.5, what would change?
Steve Gifford, MBA, SPHR, is an HR Business Partner and
Management Consultant for OEM America, where he is the senior human capital
consultant for OEM's client companies. He has HR leadership experience in
manufacturing, retail, CPG, and government sectors, and is a contributor to
FistfulOfTalent.com. You can follow him on Twitter at @BaghdadMBA, or
connect with him on Linkedin at www.linkedin.com/in/stephengifford
Creative Commons image "Retirement" by tax credits