Over the past thirty years, pensions have almost disappeared in the private sector. Fortunately, pensions are still fairly common in the public sector, but even there, they are under attack. This decline in the availability of pensions represents a shift from a retirement system where everyone pools their resources and gets the promise of a guaranteed payout for life to one where each person is on their own, responsible for scraping together their retirement savings. This shift has not just harmed the retirement security of working families, but has harmed the U.S. economy.
According to a new study from the University of Paris- Sorbonne, the decline in pensions has led older workers to remain in the workforce for longer. This reduces the opportunities available for younger workers. Since older workers do not have the security of a pension to rely upon in retirement, they either stay in their current jobs longer or work during retirement. This crowds out younger workers, who may be more productive than the older workers who linger in the workforce.
The rise of “do it yourself” retirement also reflects the growing income inequality in the United States. The 401(k) was originally created to provide a way for corporate executives to save some of their high earnings in tax-advantaged accounts and this is what it has been most successful at doing. The 401(k) was never intended to be the primary retirement savings vehicle for most workers, but that is what it has become. However, since the average worker does not make anywhere close to the income of a corporate executive, they have less to contribute to a 401(k) and, therefore, do not truly benefit from it. For the average worker, a defined benefit pension remains the best way to save and prepare for retirement.
As Michael Molinski asked recently in USA Today: “So is the answer just to keep working and save more in your 401(k) and hope for the best? Or does the answer require a broader perspective, bringing government, corporations and workers together to look at ways of either resurrecting pensions or creating legislation that requires companies to contribute more to employees’ 401(k)s?” These are questions that state legislators, governors, and the presidential nominees need to be answering. There is a retirement crisis looming as those in the first generation of “do it yourself” retirement begin to retire without adequate preparation to do so.