Worried about how you'll pay for retirement? You should be. Jonathan Shafter argues that it's time to reshape the foundations of American household savings and social insurance.

Nobody can deny that irresponsible and shortsighted behavior across many of our core financial institutions was a cause of our present financial crisis. But the full story of this crisis is far more complicated than a simple morality tale of Wall Street greed. Financial bubbles and subsequent meltdowns have been alarmingly frequent in recent decades. Wall Street may have been the supplier and enabler of imprudent financial risk, but who was the buyer?

The answer, in part, lies in the tragic long-term financial predicament of the typical American household trying to rationally and responsibly save for retirement. It is difficult-to-impossible for a typical family to make the long-term numbers work by investing in safe assets which strain to match much less exceed inflation. To even have a chance of a secure financial future our family must gamble its savings in risky assets.

Our family thus faces a Hobson's choice - it can assume significant financial risk, in which case it has some chance of accumulating sufficient retirement funds, or it can opt for safe assets, in which case there is virtually no chance of sufficient long-term accumulation. Much has been said over the past year on the asymmetric incentives of bankers leading them to engage in systemically risky behaviors. Not nearly enough has been said on the situation of American households and the incentives that force them to chase yields and returns well outside otherwise prudent risk parameters.

Systemic reform of our financial institutions is necessary but insufficient to prevent future crises. Progressives must also undertake a wide, integrated rethinking of our institutions for long-term household savings and social insurance. Families must be given an option whereby they can reasonably plan on a secure, adequate retirement if they do the right thing and responsibly save over their working lives. Miracles cannot be worked and some adjustment of expectations may be necessary such as an extension of working years to match lengthening lifespans.

But better institutions for household economic planning and risk management are also possible. For example, a worker fully invested in equities retiring in 1999 would have sufficient assets to purchase an annuity replacing 89% of their peak salary. For a worker retiring in 2008 that figure drops to 27%.* Government managed or encouraged investment structures could pool and reduce some of that gut-churning volatility across time. Other potential innovations might include the macro-markets proposed by Yale economist Robert Shiller for insuring households against dangerous economic risks.

The Social Security Act signed by Franklin D. Roosevelt in 1935 may be the most significant and enduring achievement of New Deal 1.0. Social Security was no mere tinkering at the margins of society. It was a bold new paradigm that dramatically rewrote the economic and social compact of America for the better. Rather than simply assuming that our financial system will work for most Americans once regulation purges excess risk and greed from Wall Street, today's Progressives must once again reshape the foundations of American household savings and social insurance if today's financial crisis is not merely to be prelude for the next.

*Gary Burtless, Financial Market Turbulence and Social Security Reform in Pensions, Social Security, and the Privatization of Risk (ed. Mitchell A Orenstein), Columbia U. Press, 2009.

Jonathan Shafter is a Managing Director and Portfolio Manager at a financial services sector focused investment fund.