Pension Change Puts the Burden on the Worker
American workers now
put more money into pension and retirement savings plans sponsored by their
employers than the companies themselves do. That remarkable milestone, determined by pension
researchers reviewing the most recent data, shows just how far companies
have moved away from the system of decades past, in which employers alone
financed the retirement savings of their workers, and toward 401(k) and
similar retirement plans financed mostly by workers. The milestone is all the more remarkable because
401(k)'s and similar retirement accounts were never intended to be the main
way for an employee to save for retirement. They were originally expected
merely to supplement company-financed pension plans. The new-style plans lack the protections of the old
pension plans, like a guaranteed benefit and federal insurance to protect
retirees if the company goes bankrupt. The huge losses on retirement savings of workers at Enron and other troubled companies have focused attention on the vulnerability of the new retirement accounts. Yet most American workers are optimistic about their
financial prospects in retirement, confident they will have enough money to
live comfortably, according to a survey released in February by the Employee
Benefit Research Institute. These workers are optimistic even though Americans
generally are notoriously weak savers, with many lacking financial
education. While corporations and the financial industry have shifted the
burden to employees, they have far to go in adequately educating the public
about its responsibilities in paying and planning for retirement. "We have to look at the issues from a broad point
of view, one that encourages saving and which reduces the risk on the
saver," said William V. Roth, the former United States senator from
Delaware who was a leading Republican voice on pension and retirement
issues. "It's a real concern. We want people to reach their so-called
golden years with adequate funds to live comfortably." Even people who appear headed toward a comfortable
retirement may find themselves vulnerable. Last fall, Wade Robert was
counting down to a planned early retirement in February of this year after
15 years as a vice president of United Technologies near Washington. Then
the events of Sept. 11 sent stock prices into a tailspin. Mr. Robert found
that about half of the value of his 401(k) account was in United
Technologies stock and could not be moved to other investments because of
company restrictions. Unlike many Enron workers, Mr. Robert was also covered by a traditional pension plan, which enabled him to retire as planned in February at age 57. But only 17 percent of American workers have both types of plans, and the portion is likely to decline as fewer companies provide traditional pensions. To even the most astute participants, the current
pension system is a bewildering array of regulations and options for
companies and employees. Mr. Roth, for example, said he had to consult a
pension expert after his retirement from the Senate to help figure out his
pension plan. Congress and the administration have begun discussing
possible changes in retirement policy, and two partisan bills are winding
their way through Congress. Few people in Washington are yet predicting new
programs as radical as those that led to the Employee Retirement Income
Security Act, the 1974 law known as Erisa that created a
government-sponsored insurance program for pension plans, but that does not
mean that change will not come in waves over the next several years. It is worth noting that 11 years passed from the time
that the Studebaker Car Company jolted the system by terminating its
employee pension program in 1963 until Congress, after dozens of false
starts, finally passed Erisa. "Retirement policy has really come to the
forefront thanks to Enron, and I think it will stay there for a while,"
said Eric Lofgren, global director of the benefits consulting group for
Watson Wyatt, the giant pension adviser. "I would be surprised if there
was not a series of legislative moves over the next decade, as we learn what
works and what doesn't." The changes in the American pension system stem from familiar causes. In the 1950's and 1960's, stable jobs and long tenure at a single company were the norm, and companies found it advantageous to build pension plans that offered workers a fixed payout upon retirement. The payout in those programs, known as a defined benefit, was derived from a formula based on a worker's years of service and his average salary in the last few years, with most of the benefits accruing in the final years before retirement. That changed in the last quarter- century, as workers
and their families became much more mobile, changing jobs and regions of the
country more frequently. Demand grew for retirement plans that could move
with an employee and that accumulated a larger portion of benefits
initially, rather than being dependent on the later years of a long career
of service. Corporations embraced the newer plans, which allowed
them to make upfront contributions to a retirement account. The newer plans,
known as defined contribution programs, shifted to employees the burden of
investing the money to cover their living expenses at retirement, thereby
saving companies the cost of managing that money over an employee's entire
life, as well as the cost of premiums for federal pension insurance. Companies also found that they could trim costs further
by cutting the amount they contributed. Now, on average, companies put up
less than 50 cents for every dollar set aside by employees, and many
companies make their contributions in the form of their own shares, rather
than cash. Companies have not had to work hard to get employees to embrace the new plans. All they had to do was point to the superior long-term returns of the stock market, implicitly promising employees greater benefits at retirement than they could expect from a traditional pension. No small factor in bolstering the popularity of the newer plans was the fact that just as the first 401(k) accounts appeared in 1982, the stock market began an 18-year bull run. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
|