4 Retirement Pillars Have Serious Cracks

As reform efforts gather momentum, roles and flaws in current supports need to be addressed.

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Something not-so-funny has happened to millions of Americans, including me, on the way to retirement. The rules have changed. This is hardly news, but much of the debate over retirement security is still shaped by the traditional view of retirement supports. That long-held view was that retirement was a three-legged stool, supported by an employer pension, private investments, and Social Security.

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One of the major legs of the stool—employer pensions—began weakening in the 1980s as employers began moving away from traditional, defined benefit pension plans to defined contribution plans. How's that working out for us? Not so good. As employees, we were not very responsible in taking advantage of these new contribution-based plans. As investors, we often sell low and buy high. Important reforms enacted in 2006 put badly needed improvements in place—just in time for the market crash of 2007 and 2008. Most 401(k) plans have since recovered a lot of ground, but not enough to reverse life-altering declines in nest eggs that weren't big enough even before the Wall Street collapse.

Private investments were never a real strong leg of the stool for most Americans. We didn't save enough and, of course, those assets got hammered during the Great Recession along with 401k(s) and IRAs.

Social Security has continued paying all of its benefits, and has assumed an importance in retirement income well beyond its initial role. Even here, however, a slowly widening funding shortfall has raised questions about Social Security's long-term viability. It needs a fix.

So much for the three-legged stool. Out with the old, as they say. Meet the four pillars of retirement. Four is more, and thus better than three, right? And pillars are more substantial and stronger than the legs of a stool, aren't they? Late last year, I interviewed a retirement policy expert who talked naturally about the four pillars. When I asked what they were, he seemed surprised. This is a well-known concept, he said, and has been in use for a long time.

[See Senior Safety Nets at Risk in 2011.]

Don't be embarrassed if you cannot name the four pillars. They have not exactly become the Mt. Rushmore icons of retirement security.

While doing some superficial research, I came across an outfit called the Geneva Association in Switzerland, which bills itself as the international think tank of the insurance industry. The association began a research effort into what it called the Four Pillars Program (or Programme, for Eurocentric readers). Here was its rationale:

"The Geneva Association launched its 'Four Pillars' Research Program with a view to identifying possible solutions to the issue of the future financing of pensions and, more generally, to organizing social security systems. Demographic trends—especially increased life expectancy—could be seen as positive if we were able to devise ways of enabling 'aging in good-health populations' to make a valid economic and social contribution to the functioning of our service economies over the decades to come."

Not bad, and especially insightful, given that the program began in 1987! The three legs of the traditional stool were retained, although the pension component was shifting into defined contribution plans. The fourth pillar, the association said, was "the need for a flexible extension of work-life, mainly on a part-time basis, in order to supplement income from the three existing pillars for future years." So, the fourth pillar was continued employment. What may have seemed an optional solution in 1987 is, of course, a necessity in 2011.

More recently, in 2005, Prudential Financial unveiled a new framework. It was called the Four Pillars of U.S. Retirement. Again, the legs of that traditional stool were still there. Now, they were supplemented with a fourth pillar the company called "Retirement Choices." It was different than the Geneva Association's pillar. In fact, it sounded a lot like Prudential's product brochure:

"There are aspects of retirement planning that fall outside of 'saving.' Many Americans may choose to continue working in retirement, while others may consider the equity they've built in their homes as a potential retirement income source. In addition, protecting retirement income through annuities and long-term care insurance, and providing wealth transfer through life insurance, are other choices individuals should consider."

[See Social Security, Medicare a Bargain for Many.]

Others have weighed in with their own views of the Four Pillars. In 2007, AARP came up with a version that lumped pensions and retirement savings into a single pillar, picked up supplemental income as a third pillar, and added affordable healthcare as its fourth pillar. Given that healthcare is the largest uncontrollable expense faced by retirees, there is logic for viewing affordable care as a pillar of retirement security. Here were AARP's objectives in 2007:

"Social Security: We must protect this essential program from destructive changes that would undermine the goal of Social Security solvency. The public must be educated about their need for additional income because too many Americans are relying upon Social Security as their chief source of retirement income.

"Affordable Health Care: Health care is one of the most pressing issues facing American seniors today. Without affordable health care, a person's entire retirement security could be hanging in the balance—left vulnerable to an unplanned illness or other health concern.

"Pensions/Retirement Savings Plans: Too many Americans have suffered recently as an increasing number of businesses have dramatically scaled back retirees' pension and benefits plans—putting retirement security at risk for countless Americans.

"Supplemental Earnings: Many seniors can't afford to retire when they wish. More employment opportunities must be created for American seniors who want to work, and age discrimination should be kept out of the workplace."

So, perhaps the Four Pillars haven't quite settled into their new roles. Maybe your fourth pillar is having a roof over your head. Or that hoped-for inheritance from Uncle Sid. Works for me.

Twitter: @PhilMoeller