America's Road to a DIY Retirement

0:00This is a new era of American innovation. Using Google AI, Etsy is making it easier for shoppers to discover unique creations and helping sellers connect with the people who love their work. Learn more at g.co slash American Innovation. So, Jason Zweig, what is a tontine? So a tontine is an informal kind of insurance in which a group of people get together and they pool their money. and as each member of the tontine dies off, the money is then redistributed among the survivors. Jason Zweig writes the Intelligent Investor column at the Wall Street Journal. He spends a lot of time thinking about how people invest and how they used to invest.

0:48You may have heard about tontines from popular culture. They've been the subject of an episode of The Simpsons. How many of you are familiar with the concept of a tontine? They essentially, we all enter into a contract whereby the last surviving participant becomes the sole possessor of all them birdie pictures. We're in the animated television show Archer, and we're also the subject of a 1966 movie called The Wrong Box, starring Michael Caine. Grandfather has murdered Uncle Joseph and then suffered a conniption fit. No, you never said. And he did it because he wanted me to have the tontine. Tontines originated in Europe, but became popular as a financial tool in the early years of American independence.

1:36Alexander Hamilton even proposed using a tontine system as a way to manage and fund national debt. His plan wasn't approved, and tontines eventually lost popularity due to fraud and corruption. They also had a bad reputation in popular culture. Members of some tontines developed an unfortunate habit of murdering some of the other members to get the money early. But before they fell out of fashion, tontines were some of the earliest tools that people used for retirement. If you think about it, it is in principle not that different from a lot of forms of insuring for retirement. And it's an interesting metaphor for the risk that's inherent in every retirement system.

2:27We're all making a gamble that the money set aside for retirement, either by us, by our company, or by the government, will be there when we need it when we retire. And it doesn't always feel like a gamble, but there's always some risk inherent in it. Today, Americans no longer resort to tontines for retirement. We rely instead on three main pillars of savings. Pensions, Social Security, and savings in a 401k or IRA. That system might be less secure than we think. People like to call this the three-legged stool, but the stool is a little shaky. What would you say is the shakiest leg of that stool?

3:15Well... Or are they all at equal risk of collapse? I think all the legs of that stool are a little shaky. A lot of Americans don't feel like they're financially prepared for retirement. Only about a third of people approaching retirement age report feeling, quote, on track. I'm a nurse. He's an electrician. And it's hard, even with the money that we make, to feel like we're putting an adequate amount aside for our future. So I don't get no 401k or no pension or any of that kind of matter. So I'm in the process of looking for like a side hustle, maybe a little crypto. I feel like I'm going to have to work till I die.

3:57For more than 100 years, the U.S. has been grappling with what retirement should look like and how we should achieve it. At the same time, the challenge has been growing. People are living longer and have many more post-work years than they used to. Who bears the responsibility for funding our retirement? And how is that changing? It's Sunday, March 8th. I'm Katherine Sullivan for The Wall Street Journal. This is USA 250, a podcast series connecting America's economic present to its past. We'll be occasionally dropping into your What's News feed over the next few months with stories that interrogate, celebrate, and make sense of our economic history.

4:35This is Episode 3, America's Road to a DIY Retirement.

4:43The fact that a human life is twice as long now as it was just 100 years ago is this enormous shift just in what we expect a life to be. And it struck me that this is one of the biggest challenges morally, ethically, economically, politically that modern societies face. James Chappell is a professor of history at Duke University and the author of the book Golden Years, How Americans Invented and Reinvented Old Age. I asked him about when the idea of retirement began to take hold in the U.S. What emerges in the 20s and 30s is an idea that old age should be a time for relaxation and leisure. This was a new concept.

5:27Until this point, most people just worked until they died. or were cared for by their families, or went to spend their last years in poor houses. There wasn't yet a vision of older people moving to Florida en masse and organizing their lives around golf or pickleball. But during this time, groups had begun to advocate for a government pension. These groups came from all ends of the political spectrum. One of the most popular, and also one of the most outlandish, was started by a man called Francis Townsend. Francis Townsend was a physician. He comes out of the tradition of Midwestern socialism.

6:03He moves to California and he starts this movement that kind of takes fire. There are towns and movements and clubs across the whole country, millions of supporters. And it is, I think, at least in its pure uncut form, a crackpot scheme that drove the Roosevelt administration crazy. President Franklin Delano Roosevelt's administration was focused on pulling the country out of the Great Depression. And to that end, the Townsend Plan had a straightforward demand. $200 a month for everyone over the age of 60, funded by a 2 % sales tax. That's about$5 ,000 a month in today's dollars. The catch? You had to spend the whole benefit within the month.

6:49This is the middle of the Great Depression, right? One of the problems is, how can we save this economy? How can we jumpstart consumer spending? And Townsend's idea is like, OK, let's give old people a huge amount of money and force them to spend it. And so he has a vision where the spending of older people kind of rejuvenates the whole American economy. Here's a newsreel of Dr. Townsend fielding questions about the program from senior citizens. May I ask a question? Do my wife and I both get the pension? Yes, husband and wife will each receive$200 a month. I'm over 70. How long will I have to wait to get the pension?

7:33If we all continue to do our part, we should be able to elect the next Congress of the United States, and the Townsend plan should follow soon after that. Townsend's slogan was youth for work, age for leisure. The idea took off. Over 7 ,000 Townsend clubs formed across the country, working to advocate for the plan. They organized massive letter-writing campaigns to members of Congress and even set up trial versions of the program. And so they did some tests where they found some older couples in random places and gave them all this money. And they're like buying fur coats and automobiles and all kinds of things.

8:17as an attempt to prove the viability of this scheme. The movement put enormous pressure on lawmakers to create some sort of safety net for older people. And the pressure worked. In 1935, President Roosevelt signed Social Security into law. This Social Security measure gives at least some protection to 30 millions of our citizens who will reap direct benefits through unemployment compensation, through old age pensions, and through increased services for the protection of children and the prevention of ill health. Social security, then as now, is largely financed through payroll taxes and is paid out to eligible workers based on their years of highest earned income.

9:07Historians tend to think that social security emerged because, at least in part because the Roosevelt administration knew they had to do something, because this is what people are clamoring for. Average monthly payments for early Social Security recipients were only about$23, a far cry from Townsend's vision. But the passage of the program took the steam out of the Townsend movement. Its clubs across the country eventually closed their doors, and Social Security became, and still is, the largest anti-poverty program in the nation's history. It also became the first leg of Americans' retirement stool.

9:46Under the Social Security Act, most American families are now able to insure for themselves an income that is guaranteed for life. It's an income provided not by charity or relief, but by federal old age and survivor's insurance. Insurance that is bought and paid for. At the same time, more and more corporations started offering employees pensions, also known as defined benefit plans, thanks largely to the work of labor unions. Growing numbers of American workers added the second leg to their retirement stool, the pension. But there were problems on the horizon that would disrupt the nascent retirement system.

10:28When people get up in age and the bottom drops out, like what happened to us, it's a crime. After the break, the stool starts to wobble.

11:09In 1963, car manufacturer Studebaker went bankrupt and canceled its pension plan for thousands of workers who had been counting on it. And it wasn't just Studebaker that was failing its pensioners. By 1965, over 4 ,000 pension plans had been terminated over the previous decade, leaving 20 ,000 workers per year in a lurch. A 1972 NBC News documentary spoke to workers from all over the country who hadn't received the pension they'd been promised from their companies. You wake up in the middle of the night in a cold sweat, knowing all your work, all your life has gone down the drain. I don't know, it's a very...

11:51It's a deep emotional thing with me.

11:57Sometimes I'm ahead of it, sometimes I'm not. Complaints about pension failures moved Congress to act. In 1974, they passed a law that was meant to put guardrails on private pensions and prevent even more widespread failures. It was called the Employee Retirement Income Security Act, or ERISA. They also created a new tool that allowed individuals to save for their retirement on their own, the IRA, or the Individual Retirement Account. James Chappell from Duke says these changes that began with ERISA marked a shift in responsibility. Little by little, the government was encouraging individuals to take on their own retirement planning.

12:39And so it's such a big shift from what we saw in the 1930s, where the government is the solution to problems. In the late 70s and 80s, Washington is not even claiming that anymore. They're quite clear, like, these are not our problems to solve. These can be solved by you. These can be solved by the private market. This is where Americans start to believe that retirement is no longer a public good, but a private good. And that belief took off. With the failure of several high-profile pension funds like Studebaker, the option to take full control over your retirement savings looked pretty appealing.

13:21It also looked appealing to companies. So companies did not love offering pensions. Justin Baer is the deputy markets editor at The Wall Street Journal. He wrote about this period in a forthcoming book about the financial services company Fidelity. Particularly if you were in a very cyclical business where your earnings may differ widely from year to year, right? And a down year of having to then set aside part of those profits for your pension plan because the market didn't perform well, that was not a great situation to be in. So they were very happy to look for any opportunity to sort of offload that responsibility onto their employees.

14:04Fidelity and other firms like Vanguard had been behind the scenes, managing pension funds for companies. But they soon pounced on the new individualized plans that the government had opened the door to. You know, I think in the case of Fidelity and others, part of the appeal is, oh, this is another platform through which we can sell mutual funds, right? Which was, for them, still very much the biggest business and the main thing that they did. Investment firms realized they could go directly to individuals to sell them retirement plans. And the IRS continued to pass more regulations allowing for personal retirement accounts.

14:43Consultancy firms would scan new tax laws looking for ways to manage savings. So this guy, Ted Benna, he had been running one of those pension consulting firms at the time. And he was one of those guys that would scour every new law for applications that might benefit his clients. Here's Ted Benna. 1978, one of these end-of-the-year tax bills where things get thrown in, you know, in order to get votes, Section K was added under 401 of the IRS code. It was a page and a half long. That's all it was. The provision allowed for companies to provide cash or deferred arrangements to employees. Here's Benna again, explaining his innovation on a financial podcast.

15:33So what I came up with was the idea of let's increase the ante, let's add a matching employer contribution that says, well, if you're willing to defer this for retirement, you'll get a tax break, but you'll also get additional money and a match. Benna realized companies could use these matching funds as perks to offer employees. Companies liked them a lot more than traditional pensions. The industry starts to adapt. They get it. But employees were skeptical. There's a funny story where a lot of companies started calling these programs salary reduction programs, you know, which was not very appealing, right?

16:14If you're an employee, particularly, you know, you're just starting out and they say, oh, we've got this new retirement plan. It's called salary reduction plan. It's like, well, I don't want to get paid less. That's crazy. Companies eventually rebranded the plans. And by the mid-1980s, major Fortune 500 companies began to embrace the 401k. By that point, it looks a lot more appealing, right, because the market is really taking off in, you know, starting in the early 80s. And so suddenly the idea that you'd be picking winners, picking funds you really like, that seemed a lot easier when the market is rising sharply as it did for that period.

16:58By the early 1990s, 401k type plans had overtaken the pension. They became the third leg of the retirement planning stool. But when the 401k was introduced, employees may not have understood the tradeoffs between these types of defined contribution plans and pensions. I think what was not as well understood by employees was how, yes, over a long period of time, the market goes up usually, but it doesn't always meet your timetable, right? So I think where it's hurt the most has been when we have disruptions to the market, we have down markets at moments when you have a lot of people who are edging closer to retirement.

17:50And then losing 20 % or 30 % of that so close to the finish line is very painful. That exact thing happened over 15 years ago during the 2008 financial crisis. After 2008, I recall, I wrote an article even about the 401k and whether it had failed. Anne Turgesson covers retirement at the Wall Street Journal. She spent 18 years talking to people about how they're managing or planning to manage their retirement. She remembers a moment when it looked like maybe people were not comfortable with keeping their retirement exposed to the stock market. It was in 2008, during the Great Recession. At the bottom of the crisis in March of 2009, the market had lost more than 50 percent of its value from its peak in October 2007.

18:36The value of people's IRAs and 401ks plummeted. ...mortgage, chances are your monthly 401 statement will remind you that you've lost a good chunk of your savings. Trillions of dollars have evaporated from those accounts that have become the prime source of retirement funds for a majority of American workers, affecting their psyche and their future. People were really worried about the reliance of 401ks on stock market risk. And some fraction of the experts I spoke to were willing to throw in the towel on the 401k and declare it a failed experiment. And people were coming up with alternative ideas.

19:17Some wanted to build out Social Security. Others wanted to find ways to go back to pensions, some kind of hybrid, just something that would reduce the level of stock market risk. None of these options gained steam. And instead, Americans embraced the 401k even further. And here we are, you know, here we are in 2026. And the 401k is sort of booming. Auto enrollment in 401ks has tripled since 2007. Roughly 43 % of Americans contribute to one. But anxiety about savings hasn't eased. I think probably people maybe have greater anxiety about retirement because it's up to them to save in a 401k. And then it's up to them to figure out, OK, well, I have a couple hundred thousand dollars.

20:10Is that actually, how am I going to make that last? According to the Bureau of Labor Statistics, around 70 percent of private sector workers have access to a 401k-style plan at work, but only about half actually participate in it. While that's up from prior years, it still means a lot of Americans don't have the tools they need to save for retirement. President Trump has floated the idea of providing retirement plans to these workers, but he gave few details of the plan. It's one of the big problems that our retirement savings system confronts, which is that we don't have universal access to these savings programs at work.

20:52Lots of big companies offer retirement savings plans. But small businesses don't have the bandwidth to offer matching plans for their employees, leaving those workers at a disadvantage. Dozens of other countries require companies to provide retirement plans for their employees. It's always been, in this country, left up to companies, to employers, to decide whether to offer these programs or not. So it's just the bias of the way our system is set up. After the break, we look at new uncertainties coming for the future of our retirement system.

21:38There's a discussion going on now about what kinds of investments can go into a 401k. Last August, President Trump signed an executive order allowing 401ks to invest in, quote, alternative assets. That's things like private equity, real estate debt, and cryptocurrency. According to a poll conducted on behalf of the Wall Street Journal, only about 10 % of Americans are looking for more investment offerings in their 401ks. Anne Targeson wrote about this. I have walked up and down Sixth Avenue and interviewed people about this question. And what I generally found on the basis of an afternoon spent doing that is that men in their 20s, especially those who work in the financial services industry, tend to be like they actively want this.

22:27Other people were sort of like, what? What is private equity? Can you explain that to me? The White House told me the order levels the playing field for individual investors who want access to potentially lucrative private and alternative investments and is, quote, not an endorsement of any particular asset class. A lot of the lobbying for this is coming from the private equity industry. Private equity is looking for access to the roughly$10 trillion currently invested in 401k plans. It would be a lot more business for the sector. But it's unclear whether 401k administrators will be willing to offer these alternative assets.

23:03Private equity funds generally come with much higher fees than publicly traded assets. Private markets also carry more risk for investors. Some experts think placing these assets in 401ks is too risky. Former Goldman Sachs chief executive Lloyd Blankfein told The Wall Street Journal about what he sees as a short-sighted decision by the private equity industry. I think it's crazy to put those assets there. And I think it's crazy from their point of view. They have nice lives. They make a fortune. The companies are huge. They already own their yachts and whatever it is they want. Why are you going into this dangerous territory just to make your business a little bit bigger?

23:42And that represents such a big potential problem in the future. There's another potential problem coming in the future. But this one has to do with Social Security. The program is extremely popular. Around 40 % of seniors rely on Social Security payments to make up at least half of their monthly income. Between 12 and 15 % rely on it for over 90 % of their income. But a lot of Americans believe it will run out completely in their lifetimes. Honestly, I feel like there won't be Social Security by the time I end up retiring. I don't rely on it at all. Would you? Social Security won't exist by the time because they're still paying people from the 1800s that died.

24:24This isn't true. Social Security is not disappearing. But it is facing a budget crisis. A lot of people, not everybody, but a lot of people have some level of anxiety that that Social Security will be cut because Social Security is facing a funding shortfall that depending on, you know, who's doing the estimating, it's likely that it'll hit in like 2032, 2033, 2034, somewhere around there. According to the Social Security Trustees report, the funding shortfall will come in 2033. If Congress doesn't find a solution to this problem, benefits could be cut by more than 20 percent across the board.

25:06So people know that this is coming and it's looming and Congress has to come up with a fix. This year, the office of the chief actuary published a menu of over 140 potential changes that could be made to fund the program. People are floating proposals, but often they're not bipartisan. It's clear that it's still early days in the process of fixing Social Security or even addressing Social Security's funding shortfalls. Social Security has faced a funding shortfall before. In 1983, Congress passed bipartisan reforms to shore up the program just months before funding ran out. To close the gap, they made several different changes, including raising both taxes and the retirement age.

25:50This time, they have about seven years left to stabilize the program. Despite all the uncertainties in our current system, Jason Zweig, our investment columnist, doesn't think we should just go back to the old system of pensions. I think there's a tendency among a lot of people today who comment on retirement plans to glamorize defined benefit pension plans and to say, oh, back in the 1950s, you know, oh, leave it to Beaver. It was a great time to retire. You know, you sat in front of your black and white TV and you spent your monthly pension check and you lived a good life and you had the American dream come true.

26:37Even at their peak, pensions only provided payouts to less than half of Americans. And often those payouts were very small. In fact, the good old days were kind of bad. Or maybe another way of putting it is the good old days never were. In the present as in the past, a comfortable retirement was never guaranteed. We may have created the illusion that all Americans could retire into a life of leisure, but that was never true for everyone. There's always been some risk. If a whole bunch of people are investing to insure themselves against the risk that they'll run out of money and they're putting their money in the stock market, It makes very good sense to remember that the New York Stock Exchange originated at a place called the Tontine Coffeehouse.

27:28Tontine, as in the last man standing version of retirement insurance. The coffeehouse, established and financed as an actual Tontine, is where some of the earliest trading took place after the Buttonwood Agreement was signed nearby in 1792, creating the Stock Exchange. It shows how inextricably linked these two ideas are. The idea that retirement is an insurance policy against risk and it's pooled with lots of people. And that is inextricably linked to the stock market. It just is. Is it still all just a gamble?