The Charade That “Retirement” Accounts Are For Retirement
It’s time we stop the charade. Congress should rename 401(k)s and IRAs what they really are: “Emergency Savings Accounts for the Poor and Middle Class.” Because that’s how they function for the bottom 90% of American workers.

A new Employee Benefit Research Institute (EBRI) report confirms what retirement experts have long understood: Americans are draining their 401(k)s to survive today, sacrificing tomorrow’s security. The study reveals where borrowed retirement dollars actually go—not toward buying homes or funding education as policymakers hoped, but toward covering basic expenses and managing debt.

This should surprise no one. For years, researchers have documented that 401(k)s and IRAs function less as retirement security vehicles and more as emergency piggy banks for struggling families. My own research with colleagues found that economic shocks like job loss, divorce, and health crises drive a fifth of all retirement account withdrawals, with low-income workers disproportionately affected.

The CARES Act, which eased access to retirement funds during COVID-19, only accelerated this pattern. While intended to provide relief, it essentially acknowledged what Congress refuses to admit: for millions of Americans, these accounts are not retirement savings—they’re the only financial cushion available when crisis hits.

The Policy Fiction Behind “Retirement” Accounts
It’s time we stop the charade. Congress should rename 401(k)s and IRAs what they really are: “Emergency Savings Accounts for the Poor and Middle Class.” Because that’s how they function for the bottom 90% of American workers.

The evidence is overwhelming. Workers experiencing financial fragility—those who can’t come up with $2,000 within a month—are significantly less likely to own retirement accounts and, when they do, they withdraw from them at higher rates. Research demonstrates that those struggling to make ends meet are paradoxically more likely to calculate their retirement needs, perhaps because they recognize the precariousness of their situation, yet they lack the resources to adequately save. The system forces impossible choices: pay this month’s bills or save for retirement decades away.

Early Withdrawals Permanently Undermine Retirement Security
Borrowing from your 401(k) reduces retirement income security, but withdrawing before retirement is even worse for eventual accumulation. According to the EBRI analysis, hardship withdrawals permanently deplete retirement savings, with no opportunity for repayment. Yet Congress continues to maintain the fiction that these are primarily retirement vehicles, imposing tax penalties that punish workers for accessing their own money during crises—while simultaneously making these accounts the default emergency fund for millions.

This dysfunction has real consequences. Research in my lab shows that workers in the bottom income quartile withdraw retirement funds at more than twice the rate of those in the top quartile when facing job loss. They also withdraw larger percentages of their account balances — depleting retirement security precisely when they can least afford it. Financial hardship creates a vicious cycle: those with the greatest need for retirement savings are forced to raid those accounts, ensuring inadequate retirement income.

Alex and Taylor started at the same place and stayed there. They had the same employer, same job, same pay. For twenty years their inflation-adjusted salary held steady at $100,000, and they did exactly what HR said was “responsible”: each put 5% into the retirement plan, and the employer matched 5%. Same portfolio. Same discipline. Same 5% annual return. The HR director brightly said, “put in your contribution now, you can always use take some out if you have a real need!”

Then Year 5 happened.

Alex’s car died in a way that wasn’t dramatic, just final. We have all been there, the repairs equal the value of the car. But if she can’t commute; she can’t work. She took $10,000 from the plan to buy a used car and, for that year, she stopped contributing. Taylor never touched the account and kept contributing as usual.

Twenty years in, they sit at the same cafeteria table, eating the same cottage cheese, looking at the same benefits portal, and the numbers no longer match. Taylor’s balance after 20 years: $330,660. Alex’s balance after 20 years: $289,081. Taylor’s account is more; the difference at year 20: $41,579. And the difference hurts and it is not entirely Alex’s fault. The social rule and custom in America is to use one’s 401(k) for hardship withdrawal, and hardships to some people occur almost every year.

That gap isn’t just the $10,000 Alex withdrew, or the $10,000 contribution she missed that year. It’s those two hits, pushed forward by compound growth for the remaining years—an ordinary necessity (a car to get to work) turning into a long-run wealth penalty.

Social Security And Retirement Accounts Are Failing Together
The solution requires confronting two urgent priorities. First, Social Security must be saved now. If Congress and the president do nothing, benefits will be cut by approximately 25% in seven to eight years. This is not a distant threat—it’s an imminent crisis that will devastate retirement security for millions of Americans who have no other guaranteed income.

Second, all workers should have genuine retirement accounts—like those proposed in the Retirement Savings for Americans Act (RSAA)—that prevent withdrawals until retirement. Having accounts accumulate over an entire career is the only math that works for people to maintain their pre-retirement standard of living. For middle-class workers to remain middle class in retirement, they need accounts that actually serve retirement purposes.

Read more @forbes