Column, 619 words

Danger Ahead: Our Disappearing Pensions

Sam Pizzigati

How’s your 401(k) doing?

Working Americans ask themselves this question — and angst about the answer — a great deal these days. And why not? For most Americans, retirement reality has turned chillingly stark: Either you have a robust set of investments in your 401(k) or you’re facing some really rocky happy years.

A generation ago, working Americans didn’t have to obsess about retirement savings accounts. Americans had pensions back then, not 401(k)s. These pensions represented a commitment from employers to workers: You work here a set number of years, you can count on a monthly pension at a set amount.

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In these traditional pension plans, the risk rested with employers. They shouldered the responsibility for funding a pension plan’s “defined benefits.”

With 401(k)s and the like, employees have no promised “defined benefit.” Their future retirement income depends on how well their 401(k) investments end up doing, not how long or how diligently they’ve worked over the course of their careers.

In other words, the retirement risk has shifted, from employer to employee.

Our current 401(k)s actually began in the 1980s as a supplement, not a substitute, to traditional pension plans. But America’s top corporate execs quickly came to see these investment vehicles as a cheaper — for employers — alternative. Between 1990 and 2010, the share of America’s private-sector employees in traditional pension plans fell by nearly half, from 42 to 22 percent.

This huge drop-off in traditional pension participation, says a new Economic Policy Institute report, is generating both angst and inequality.

Among America’s most affluent 20 percent, 88 percent have savings sitting in a 401(k) or similar retirement savings account. The savings in the accounts of these affluent Americans averaged $308,674 in 2010, the most recent year with data.

In America’s statistical middle class, by contrast, a totally different reality. Only 52 percent of Americans in the middle fifth of the nation’s income distribution have savings in retirement accounts, and these accounts average only $34,981.

And America’s poorest fifth has an even bleaker retirement outlook. Only 11 percent of those Americans have any 401(k) savings, and these savings average just $7,543.

These unequal outcomes should surprise no one. Participants in 401(k)s and similar plans have to contribute to participate. In an era of shrinking real paychecks, many employees simply can’t afford to set aside much, if any, money for their retirement.

Those Americans with comfortable incomes who can afford to set aside the maximum possible savings in their 401(k)s go on, in turn, to benefit from both the standard employer’s 401(k) matching contribution and the tax breaks that all 401(k) savings enjoy.

The predictable result: The gap between the affluent and everyone else stretches even wider.

We have moved, in short, from a traditional pension system where “many retirees could count on predictable, constant streams of income,” as the new EPI study notes, to a system where most Americans can’t afford to retire.

“For a large swath of America,” Marketwatch analyst Matthew Heimer adds, Social Security has become “the only remaining financial crutch for retirement.”

In the meantime, many of the same corporate execs who’ve cut back on traditional worker pension coverage are spearheading the charge for cutbacks in Social Security.

Last fall, my Institute for Policy Studies colleagues looked at the 71 big-time CEOs pushing the “Fix the Debt” campaign to trim Social Security and other major federal “entitlement” programs. These 71 top execs have accumulated, on average, $9 million each in their own personal company pension plans.

A dozen of these CEOs have over $20 million in their pension accounts.

If at age 65 these dozen converted their assets to an annuity, the Institute for Policy Studies researchers note, “they would receive a monthly check for at least $110,000 for life.”

OtherWords columnist Sam Pizzigati, an Institute for Policy Studies associate fellow, edits the inequality weekly Too Much. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class. OtherWords.org

  • Johnny Dollar

    My 401(k) is doing fine. That’s because I saved money via automatic deductions from my paycheck into it. Started out at 6% of pay to get the full employer match which varied over time. Of course as raises and promotions occurred, I simply upped the contribution percentage as I went along my career path. No big deal. Translated into an immediate annuity where you can get a fair quotation from many sites online, my savings in the 401(k) far outpaces Social Security benefits if you choose the government as your benchmark.

    Sam never mentions for the reader that monthly pension paychecks that still exist in the private sector average way less than $1,000 per month. The average Social Security check is $1,230.

    A person is either a saver and investor or not. If you are not a saver, then deal with it the best you can with your Social Security paycheck.

    • Aquifer

      And how much did you make and do you have any dependents?

      • Johnny Dollar

        All that matters is the IRS and SSA know exactly what I made. Every dime was reported to them from the first hour I made $3.00 in 1973. Before 401(k) plans even existed.

        • Aquifer

          You missed the point – the issue id whether you needed all your salary to meet your needs or whether you had enough to “spare” for a 401K – your response indicates to me that you made more than enough to meet your needs …

          • Johnny Dollar

            No, you missed the point. I put savings as the first priority, no matter how much I made. I simply adjusted my lifestyle according to what was left to spend after taking care of the future first. Now I am living fine off of the compounding of those first meagre dollars saved.

          • Aquifer

            No, and i don’t expect you will, either ….