Welcome to this month’s last edition of This Week in Pensions! This is the news you need to know in the fight for a secure retirement.
Before you dive into our top stories from this week, check out some stories of public employees helping their communities.
Here are the top stories from this week:
The pandemic haves and have nots: 401(k) balances hit record levels, creating more millionaires. Others struggle to save at all by Michelle Singletary. Economic experts claim that the economy currently resembles a K-shaped recovery following the pandemic-induced fiscal crisis. In this type of recovery, not all workers experience the harmful effects of a recession equally. Higher-income earners will often sit at the top of the letter K and witness an increase in their net worth. At the same time, lower-income workers at the bottom of the K will disproportionately experience a loss of jobs and income. Singletary details how this unequal rebound is also creating a dual track for many workers’ retirement savings. For the higher-wage workers who remained employed and had access to a workplace retirement plan, such as a 401(k) during the downturn, they could afford to continue contributing to their retirement accounts. Buoyed by a surging stock market (which was not reflective of the greater economy over the past year and a half), these workers saw their contributions explode in value, as “85% of the growth in [401(k)] account balances came from stock market performance.” However, according to the National Institute on Retirement Security (NIRS), more than half of all workers do not have access to a workplace retirement plan. And, even if lower-income employees have access to an account like a 401(k), they still face disparate challenges in preparing for a secure retirement. Wages for most workers, for example, have stagnated over the past 40 years. At the same time, a rising cost of living threatens their ability to meet everyday expenses, let alone save for retirement. Furthermore, when a worker retires, their savings in a 401(k) are subject to the whims of the financial market, and there is also a risk that they could outlive their retirement savings. On the other hand, defined-benefit pensions provide a modest yet guaranteed benefit that workers can count on. They also have a greater poverty-reducing effect than defined-contribution plans such as 401(k)s, as NIRS notes that “this may be partly due to the fact that recipients of defined-contribution income tend to have much higher net worth than the recipients of defined-benefit income.”
Best and Worst States for Pensions by Joel Anderson. In this article for Yahoo! Finance, Anderson ranks the “best” and “worst” states for public pensions based on their unfunded liabilities. As we’ve written before, judging states based on their funded status is highly misleading. An unfunded liability is merely the difference between “the total amount of benefits owed to ALL current employees & retirees and the value of the financial assets the pension plan manages.” A pension system never needs all of that money at once because a fund has a long time to earn investment returns from what employers and employees contribute. Furthermore, each pension plan provides a Comprehensive Annual Financial Report (CAFR) that shows the vast majority of retired public employees stay in the state they worked in during their career, which means they are reinvesting their pension benefits into their local economies. Stories like this are best viewed skeptically compared with the facts about public pensions.
Be sure to check back next month for the latest news in the fight for a secure retirement!