This really, really needs to be fixed. And soon.
The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to.When people talk about the "greatest retirement crisis" in history looming, this is what they mean. People with no home equity will have drained their private retirement accounts. There are going to be successive waves of older people over the next decade or so who won't be able to retire—if they have a job in the first place. There will be people who can't keep working because of poor health who will have nothing but Social Security, which will provide just a subsistence level. We risk having a huge population of elderly people living in poverty.
The median size of a 401(k) is $24,400 as of March 31, with people older than 55 having $65,300, according to Fidelity Investments. Those funds can disappear quickly in retirement, and the early withdrawals indicate that the coming retirement crisis could be even more acute than expected. […]
For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option. Taking money from a 401(k)—and worrying about the consequences later—became a more attractive alternative and a record number of Americans made early withdrawals in 2010.
Social Security expansion provides the answer, along with lowering the eligibility age for Medicare. Making these programs stronger and more generous will allow older Americans to have the promise of Social Security—a dignified old age.