It’s increasingly obvious that there is a retirement savings crisis in the United States. At any given time, half of working Americans don’t have access to a retirement savings plan through their employer. Even workers who do have an employer-sponsored plan are mostly in risky and inadequate 401(k) plans. For companies that do still offer a defined benefit pension, however, that pension plan can be a way to keep top talent and attract new employees. This just goes to show what we at NPPC have known all along: pensions are the solution to the retirement savings crisis.
A recent Associated Press article lays out the facts of the retirement savings crisis. Defined benefit pensions were once the most common retirement plan for workers. Over the past thirty years, however, traditional pensions have declined in the private sector as employees have increasingly been forced into 401(k)s. As we’ve discussed before, 401(k)s were never meant to be the primary retirement savings plan for working families. They are an “accident of history.” While private companies have used them as a way to cut costs, those cost-cutting measures have harmed the retirement security of working people. Now thirty-five percent of working-age families have nothing saved for retirement; among those who have anything saved, most barely have enough for one year’s worth of retirement.
While working families have struggled due to the decline of defined benefit pensions, the wealthy have done well. According to Federal Reserve data, the wealthiest ten percent of households typically have over $400,000 saved for retirement – significantly more than even the average middle-class household. It’s been well-documented that much of recent income gains have gone to the wealthiest households. Unfortunately, when it comes to retirement savings, the current system is setup to favor those wealthy households. Since so much of retirement savings is done through tax-advantaged accounts like 401(k)s, wealthy households gain a greater tax savings by using those accounts than working-class or middle-class households do. So the wealthy have more to save in the first place and the current system of retirement savings favors them.
It doesn’t have to be this way though. Defined benefit pensions remain the best way for working families to save for retirement. And defined benefit pensions are still an attractive benefit for employees. According to the Boston Globe, private companies that offer traditional pensions find that they are an effective way to retain top talent. In a time when many Americans find it difficult to save for retirement, the opportunity to earn a pension is an attractive one. The problem, of course, is that not enough Americans have access to a traditional pension anymore. The first step toward solving the retirement savings crisis is recognizing the enduring value of defined benefit pensions. The second step is providing more working families with access to pensions.