The 401(k) disasterPoint: Scott Adams
Our country is facing the greatest threat yet to ensuring retirement security for every American. The reckless experiment of relying on 401(k) plans has been a failure. Many Americans have seen their dream of retiring with dignity vanish along with their home equity. Worst, many cannot afford to retire at all.
This very big challenge is a societal one. Do we leave all the risk of providing retirement security to individuals and their 401(k) investment plans? Or do we create a plan in which responsibility is shared by individuals, employers, taxpayers and our government? Pension plans offer a solid guide on how best to provide a dignified retirement.
Some of our retirement challenges are demographic. The oldest baby boomers are eligible for Social Security retirement benefits. We are living longer, getting older and spending more on healthcare as we age.
Pension plans such as the California Public Employees Retirement System have been and will continue to be sustainable. Contributions paid in by one generation help pay for reliable benefits for past and future generations.
Pension systems rely on actuaries to provide fiscally sound long-term analyses of their funding statuses. Actuaries look at demographics, mortality rates, the ratio of workers to retirees, benefit levels and investment-return projections to determine the level of contributions needed to maintain a healthy funding status.
The private-sector shift from pensions to 401(k) plans has been devastating. Today's financial crisis exposed our vulnerability to relying on 401(k) plans for retirement. Millions of Americans saw their life savings vanish during this recession; those who worked hard all their lives and were close to retirement have been particularly hard hit. For them, the markets will not recover in time.
Nobody wins when hardworking Americans need government assistance and welfare to survive. Instead of continuing to contribute to their community, these proud citizens become a drain on our economy and an added cost to taxpayers.
Even before the meltdown, the shift to 401(k) plans was not working. Not enough workers were investing in plans, many of those who did contribute invested in money-market funds that did not keep pace with inflation, and high management fees ate into savings. Consequently, retirement savings were alarmingly low. In 2004, well before the current recession hit, the median retirement savings for heads of households aged 55-64 was only $60,000, according to the Center for Retirement Research at Boston College. This nest egg was not nearly enough to retire on; now for many people, these meager savings have disappeared.
When private companies froze their pension plans, middle-aged workers were left hanging. Pension plans reward long-time workers for loyalty to their company. The final 10 to 15 years on the job are crucial for increasing a pension to a level at which workers can retire comfortably. Employees in this age group have been left with little time to hit the 401(k) investment jackpot.
It's not too late to change our ways, and doing so will take sharing the responsibility. Our elected officials need to act fast.
Scott Adams is a pensions and investments analyst with the American Federation of State, County and Municipal Employees.
Sobering questions on pensionsCounterpoint: Marcia Fritz
There are some things on which we agree, Scott. I agree with you that retirement savings for most is too low, and those relying on 401(k) plans have seen their nest eggs disappear.
I also feel defined benefit plans can be the most efficient method of providing a secure risk-free retirement benefit for public-sector workers. But plans work well only if benefits are sensible and properly administered.
"Risk-free" is very valuable. Investors accept smaller returns on lower-risk Treasury bills compared with higher-risk corporate bonds. Lenders charge lower interest rates for borrowers who have higher credit ratings than for those who don't. Pension promises are no different. If workers are promised risk-free retirement incomes, then it makes sense their benefit levels should be set lower than what most would expect in retirement from 401(k) plans. Even Social Security benefits are not guaranteed.
And this brings us to the deep-tissue rub.
Our $100,000 pension club campaign revealed shocking pension-spiking in top positions. Former administrators received more their first year in retirement than they did working. You and I agree that this is wrong. But if spiking is occurring in top management positions, you can bet it's happening among the lower ranks.
Arcane actuarial reports that governing boards rely on to grant benefit increases do not do enough to clearly warn that future wage hikes, earlier retirements and market losses would push pension costs higher. And managers who advised them in closed sessions stood to gain themselves. "I didn't know" is a common cop-out used by officials now that retirement costs are overwhelming city and county budgets. But pointing fingers isn't solving the problem.
Let's discuss benefit levels, Scott. At a retirement seminar last week, CalPERS' chief actuary, Ron Seeling, warned that pension costs are unsustainable. The previous week he complained to his own board that already-rich benefit formulas continue to be increased, yet there has never been any formal discussion on what the benefit should be: no discussion on how much income should be replaced in retirement, no discussion on what is an appropriate age for retirement, no discussion on what constitutes a full career, no discussion on how much workers should contribute versus employers, and no discussion on how to prevent "legal" pension-spiking (such as adding vacation cash-ins; uniform, meal and auto allowances and dozens of other items to final pay for pension formulas). Seeling warns that pension costs will rise to 25% of pay for most employees and 50% for police and firefighters unless we find solutions soon.
Public-sector workers are protected by contract law, so nothing can be done to change promises for current workers unless the vested-right issue changes. Benefit changes can apply to new workers, but this won't be enough to make a dent because savings will occur gradually as new workers replace those who retire. More must be done to stop the bleeding, and it has to start now -- with current workers and retirees. The longer it takes your members to wake up to this, the sooner this crisis will explode.
Marcia Fritz is vice president of the California Foundation for Fiscal Responsibility.