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Approach to retirement

Do you have a good pension? Do you have any pension at all? Back in 1975, most Americans who worked for established employers could say that they do indeed have a decent pension. Back then, what the experts call “defined-benefit” pension plans set the standard. If you worked for a company with one of these plans, you could look forward to receiving – for every month of your retired life – a pension check based on your salary and years of service.

These defined-benefit plans gave employers the responsibility for funding their employee retirements. Employers contributed into retirement funds and used the investment returns these funds generated to keep pension checks flowing. If those returns came up short, employers had to fill the shortfall.

Corporate execs, not surprisingly, didn’t like bearing that risk. Over time, they maneuvered to shift the pension risk onto employees, mainly by substituting “defined-contribution” plans for the defined-benefit pensions that had their heyday in the decades after World War II. By the early 2000s, pensions had essentially morphed into employer-sponsored savings plans.

In this new “defined-contribution” universe, employees have been contributing their own dollars into their own personal retirement accounts, with employers sometimes adding a bit of a match into the mix. The employees get no guaranteed retirement check, just the money contributed into their personal retirement account and whatever investment income the dollars in the account generate.

If those investments don’t deliver, tough luck – for the employee.

In other words, with 401(k)s and other types of defined-contribution plans, workersbear all the economic risk. And in times like today, with a swooning stock market, that risk looms large for the vast majority of American workers since, as CNN reports, only 4 percent of the nation’s workforce now have their retirement relying on a defined-benefit pension plan, “down from 60 percent in the early 1980s.”

And what has this tilt toward 401(k)s and the like meant for average working Americans? The National Institute on Retirement Security addressed that question last year in a landmark study.

“The United States,” the Institute concluded, “has seen retirement security for many working families deteriorate in recent decades as collective sources of retirement income, such as Social Security and pensions, have been allowed to weaken, while defined contribution plans have dominated the private sector.”

This retreat from collective sources of retirement income does have its fans. The affluent have benefited from 401(k)s far more than average workers, and that dynamic doesn’t figure to change. These affluent, CNBC financial planning analyst Kate Dore observed earlier this month, will always be more able to contribute substantial shares of their paychecks into their 401(k)s, “allowing more time for compounded growth and greater tax benefits over time.”

The greater tax benefits have added up. Over half the tax breaks for company retirement plans are now going to our top 10 percent of income-earners.

In other words, we’re not growing retirement security in the United States today. We’re growing – with our current approach to retirement – greater overall economic inequality. The already affluent have become more affluent, and everyone else has become more insecure.

What else could we expect, suggests Tyler Bond from the National Institute on Retirement Security, in a society where income and wealth have furiously concentrated at our economic summit?

“A retirement system built around the individual ownership of financial assets cannot successfully provide retirement security,” Bond notes, “if the bottom half of near-retirees only owns 2 to 3 percent of their generation’s financial assets.”

So what can we do to start reversing the retirement status quo?

“Discussions of how to improve retirement security for all Americans often ignore the fact that the United States already has a nearly universal retirement savings system: Social Security,” note Bond and his colleague Dan Doonan in a new National Institute on Retirement Security study published last month. “A starting place for strengthening retirement security should be with Social Security.”

In Congress, progressive lawmakers have just launched an effort to shove America in just that direction. They’ve introduced legislation – the Social Security Expansion Act – that would significantly increase the benefits that Social Security provides and pay for those benefits by increasing taxes on America’s most wealthy.

An American making $147,000 currently pays 6.2 percent of that take-home in Social Security payroll taxes. But Americans making $1.47 million pay just 0.6 percent of their income to Social Security.

Excerpted: ‘Can We Ever Retire to Greater Equality?

Sam Pizzigati, "Approach to retirement," The News. 2022-06-21.
Keywords: Economics , Economic summit , Economic inequality , Economic risk , Tax , Employers , Investment , Kate Dore , Dan Doonan , United States , CNN , CNBC