The rich are different from you and me. They have more money in retirement.
And it may be that the gap between those who have lots of money for retirement and those of us with less will grow. In part, that's because the rich are getting richer.
But there's another element: Workers are depending on a system that may provide low- and moderate-income people with less money for their retirement.
"When people look out the window right now, the people retiring look pretty comfortable," said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "We're still in the golden age of retirement."
More workers retire with traditional pensions today than will in the future. Some are even retiring with both traditional plans and 401(k)s or some other type of retirement savings on top of their Social Security. That combination can add up to a comfortable old age, especially if you also have retiree health insurance.
Even so, not everyone in the golden age of retirement is raking in the gold: In 2006, half of all Americans age 65 and older had annual incomes of less than $16,890, according to the Congressional Research Service. A quarter of all retirees depend on Social Security for 100 percent of their income.
While the traditional pension plan has its drawbacks, it tends to cover pretty much everyone at the workplace, including lower-paid workers. Now that type of plan is disappearing. In its place come defined contribution plans like the 401(k). But workers don't have to participate in these plans.
And guess which workers most often choose not to put aside money for retirement? Lower-income workers often struggle just to meet the mortgage or pay the rent. Even if they do have money to save, the incentives are not as enticing for them as for higher-income workers, said Christian E. Weller, senior economist at the Center for American Progress. Because 401(k) plans reduce taxable income, a worker in top tax bracket gets 35 cents for every dollar saved. A lower-paid worker with a marginal tax rate of 10 percent gets 10 cents.
In 2001, only 13.7 percent of workers who earned $20,000 or less participated in 401(k) plans, compared with 67.1 percent of workers who earned more than $100,000, according to an analysis by Munnell and Annika Sunden, authors of "Coming Up Short: The Challenge of 401(k) Plans," published by Brookings Institution Press.
The income gap in the United States has been growing since the 1970s. While those disparities are likely to translate into a wider gap in retirement, it should be offset to some extent by Social Security's equalizing effect on retirement income.
Although changes need to be made to Social Security, it's important to recognize how it has succeeded in reducing poverty among the elderly. One in three people age 65 and older was in poverty in 1960, according to the Congressional Research Service. Today, it's less than one in 10. Social Security replaces a higher percentage of lower earning workers' incomes than it does for higher-paid workers, which is one of its strengths.
Even so, poverty remains high for women, minorities, the less-educated and people over 80, the Congressional Research Service points out. Three-quarters of the elderly poor are women.
At the Labor Department, Gloria D. Della, a spokeswoman for the Employee Benefits Security Administration, said: "We are considering the materials provided and the issues raised." An Internal Revenue Service spokesman declined to comment.
Aaron Albright, a spokesman for the House Committee on Education, said the panel was studying the implication to workers. Pomeroy, who said he began looking into the buyout issue three months ago, said that despite some reservations, he did not think Congress should outlaw the transactions.
Bradley Belt says his company wants to "enable transactions where it's a win-win-win." (Lauren Victoria Burke - AP)
"The fact that this has developed as quickly and as significantly as it has reflects a widespread belief that there's about to be a bloodbath in corporate pensions," Pomeroy said. "We need to make sure [financial companies] are absolutely creditworthy owners of these pension programs and that there are safeguards for the frozen value of the pension for the worker, come what may."
Depending on which financial firms take over the pension plans and how they do it, some analysts said, it is far from certain whether it would alleviate the burden on the PBGC. Interested parties include Wall Street firms, a financial joint-venture and private-equity firms. Some critics fear that a financial entity might buy out a pension fund and gamble with its assets, knowing that if the investments made money, the firm would reap the excess profits, and if it lost money, the PBGC, which is funded by insurance premiums paid by pension funds, would be the backup.
"This is like the latest wonderful product from the people who brought you the subprime disaster," said Damon A. Silvers, associate general counsel of the AFL-CIO. "When you have a situation in which a risk is being laid off, and none of the participants in the transaction have that much of an interest in seeing that the benefits are being paid . . . the likelihood that there are going to be inadequate assets is pretty high."
When arguing for the benefits of financial buyouts, Belt refers to his experience with some of the biggest pension failures in U.S. history, notably the $10 billion collapse of the United Airlines fund, when arguing for the benefits of financial buyouts.
"The brief history of the insurance program is littered with bankrupt plan sponsors -- Bethlehem Steel, United, Kaiser Aluminum, Polaroid, and 3,600 other companies," said Belt, who ran the PBGC from 2004 to 2006. "Ask the participants in those plans, many of whom lost thousands of dollars in benefits, whether they might have been better off with a more creditworthy sponsor that has expertise in managing pension risks."
The financial firms looking into pension buyouts have been emboldened by a pioneering deal struck this summer in Britain when Citigroup bought the Thomson Regional Newspapers Pension Fund plan. Ari Jacobs, head of Citigroup's retirement benefits advisory group, said it was "simply a matter of time" before such transactions take place in the United States.
A concern among those studying the proposals is whether they would have the effect of encouraging companies to drop pension plans. Some analysts are predicting that a series of changes to accounting rules would increase the cost and risk of maintaining such plans, possibly pushing employers to find a way out of them.
The consulting firm McKinsey & Co., in an internal report earlier this year, said that 50 to 75 percent of traditional pension plans in the private sector would be terminated or frozen over the next five years.
"The two-and-a-quarter-trillion-dollar question, though, is, once they freeze it, what do they do next?" said David Oaten, head of J.P. Morgan Chase's U.S. pension advisory group. "We are, like everyone else, looking at what that end solution is."
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