(Photo Details: Doug and Syd dressed for a 70's disco party. Revisiting the era before the invention of the 401(k) plan.)
I have read a lot of agonizing over the years about our nation’s retirement crisis. Much of the blame is attributed to our move from mostly employer-funded defined benefit plans (pensions) to our newer, mostly self-funded 401(k) retirement system. The burden for saving for retirement has definitely shifted to the employee since the 401(k) provisions were introduced in the late 70’s.
According to this article, back in 1979, 62% of private sector employees with a retirement plan were only covered by a defined benefit plan—a steady income they could count on when they retired. By 2011 that number was down to 7%. Over that same period, the trajectory for 401(k) plans went from 16% to 69%.
I have a few friends that are in that minority, still covered by pension plans in their jobs. They may have accepted a smaller base salary than their private-sector peers, but they mostly feel like it is worth it because they will make up for it when they retire.
My sister-in-law is an administrator for a California school district. One of my friends is a public school teacher, another is an attorney for the State of California--and her husband works for the Environmental Protection Agency. All of them have plans to work until at least a specific age. They can each recite to me, “If I retire at 60, I’ll get X% of my salary as a pension; if I wait until 65, it will be Y%. And I get full medical benefits if I wait until at least age Z."
Ok, so back to all the hand wringing. By most accounts, people haven’t saved enough in their 401(k) plans, most folks don’t have pensions anymore, and a lot of people are also worried about Social Security’s solvency.
So of course people look back longingly to a time when pensions were the norm. If only we had the old pension system, we wouldn’t have this new retirement crisis.
I’m not sure the whole pension thing is really all it’s cracked up to be anymore.
Public-sector workers in Wisconsin, Detroit, and San Jose, California, to name a few, have all seen what they thought were guaranteed retirement benefits slashed. Would they have taken those jobs all those years ago if they had known how the real equation of salary plus benefits plus pension was going to work out? I’m not so sure.
But it’s not just public-sector workers who are at risk. It’s airlines, automakers, and now more than a million truck drivers, construction workers, and other union members. Congress just included a provision in the latest budget deal that changed the rules for certain multi-employer pension plans. Many of those plan paticipants will likely see those “guaranteed” pensions cut as well.
Earlier this year I talked to our flight attendant for a while on our way to Bangkok. She looked to be in her mid-60’s. She said she had planned on being retired by now but her retirement benefits were slashed when United Airlines’ bankruptcy crashed her pension. The Pension Benefit Guarantee Corporation (PBGC) stepped in, but they just insure that there will still be a pension payout, not that it will be as much as you thought.
Same situation with the innkeeper I met last month at a B&B in Santa Barbara. Perhaps she would still have taken the inkeeper job later in life, she was fabulous at it. But her airline pension, from a different airline, was similarly slashed.
Does this system still look so good, so safe, so dependable? At least with the 401(k) system, the nest egg you create is actually yours to keep. Sure, the market can slash that balance for you when we have a bear market like we experienced in 2008. But it should be clear to everyone by now, that that bear market also affected those “guaranteed” pensions.
Social Security payments can be changed by congress. The PBGC guarantee is only as good the insurance company’s ability to provide the backstop. And public-sector pension promises are only as good as politicians’ and taxpayers’ appetite for supporting that promise.
My 401(k) balance (which is now my IRA) is impacted by my own ability to save and invest—and of course market gyrations--that’s true. But I’ll take that risk any day over the additional risk of my retirement income being cut by a politician or corporate bankruptcy.
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