Tuesday, November 16, 2010

Our Private Retirement System is Broken

In my last post, http://johnhlowell.blogspot.com/2010/11/europeans-want-pensions-do-us-workers.html , I noted that roughly half of European workers in a survey would be willing to give up some of their pay for bigger pension benefits. Likewise, more than one-fourth would trade some pay for better health and disability benefits.

What does all this say? To me, it says that they are, perhaps subconsciously, looking for ways to manage personal risk. As life expectancies rise and retirement savings wane, American workers fear they will not be able to support themselves in their retirement years. The current retirement system is broken.

  • Fewer and fewer companies sponsor defined benefit pensions, although most public sector workers still have them. Said differently, the taxes paid by corporate workers pay for the pensions of the public sector, but the private sector workers don't get their own pensions.
  • 401(k) plans are not the answer. Yes, they are permanent and portable, but there are issues.
  • Companies recently have shown the propensity to decrease their matching contributions with no warning.
  • Plan investments have performed poorly over the past decade or so.
  • Layoffs are numerous causing discontinuity in savings and forcing many unemployed workers to dip into or even eliminate their savings.
  • Pay increases have not kept up with increases in employees' costs of living in recent years.
On that last bullet, did I really say that? Isn't this the country where retirees have not gotten their "automatic COLA increase" for two years running because of no increase in inflation?

Workers have other costs. How much have your contributions to your "employer-provided" health care plan increased over the same two years? How about contributions to other employee benefit plans? I'd bet that the actual benefits that you are eligible for under those plans have decreased over the same period. The cost of education, especially higher education, continues to skyrocket. So, while the Consumer Price Index (CPI) may not have changed much in the last two years, YOUR cost of living probably has.

In 1974, Congress passed a bill known as ERISA -- the Employee Retirement Income Security Act. President Ford signed it into law that year on Labor Day. Note those boldfaced words -- retirement income security. 36 years later, where are we? The private pension system has been gutted. Employer-provided profit sharing is rarely seen. Money purchase plans have largely gone the way of the dinosaur. Americans are expected to save for their own retirement, but are ill-equipped to know either how or how much. 

Unlike the poorly named Pension Protection Act of 2006 (which probably didn't protect anyone's pension outside of PBGC insurance), Small Business Jobs Protection Act which surely didn't protect any jobs, the American Jobs Creation Act of 2004 which does not appear to have created any jobs, and the American Recovery and Reinvestment Act of 2009 which seems to be failing in both of those endeavors, we need a whole new approach. Don't offer me any more band-aids. They don't seem to stick.

Whether it be through tax incentives or by dis-entangling the private sector retirement program from the Tax Code, Americans need incentives to save, mechanisms to save, the ability to save and the motivation to save.

There are lots of experts out there. Unfortunately, there don't appear to be any of them among the 535 elected officials whom taken together, we call Congress.

It's much like Congress trying to figure out how to create jobs. Too many of those in Congress have never actually created a job, just like too many of them have never had to think about a pension.

Wow, ranting does the heart good. What do you think?

1 comment:

  1. Hmm, does this thing let me comment without attaching a blog name to my post? This is Jessie.

    I am no expert on this, but intuitively it seems to me like one reason that people don't put (enough) money in retirement accounts is that, especially with the precariousness of many people's current financial situations, they're afraid of not having the money liquid to use today if they need it in an emergency. It's different when someone has high enough income and low enough expenses that there's an nice cushion between the two. But what incentive is enough to get somebody who's already struggling to pay the bills, to put a big chunk of their take-home pay out of reach for the foreseeable future?

    With the health and disability benefits thing, did the study look at the results by age of the workers polled? You seem to be implying that people would sacrifice pay for health and disability benefits because they're worried about health care during retirement. In my experience, there's a lot of people my age out there who can barely even imagine their retirement 40 or so years down the road, but who are worried about access to health care in the here and now.