At Work

A pension you say, fagetaboutit

The first pension plan was established in 1875 by the American Express Company. Pensions paid to workers were at the discretion of management. Imagine that in 2019?

By 1950 about 25% of (private sector) workers had a pension. By 1960 that number was about 50% and peaked in 1980 at about 60%. Today that number is between 18% and 33% … sort of. Good numbers are hard to find and vary greatly by source.

One study shows that 88% of private sector workers had a defined benefit pension in 1975, a number I seriously question.

According to the 2017 BLS Benefits Survey only 66% of private sector workers have access to any type of retirement plan, including a 401k plan. That means the defined benefit plan is much lower.

The point is that universal coverage in defined benefit pension plans was never the case and has been declining steadily for decades. Even the original pension leaders among S&P 500 companies have abandoned the traditional pension plan, a defined benefit plan, even taking anticipated (“promised”) future benefits from current workers. A despicable action in my opinion.

Why have pensions virtually disappeared? Too costly, too volatile, heavy regulation and administration and liabilities? All the preceding.

However, there is one other factor, a big one. Nobody hired today is going to work for the same employer for twenty or thirty or forty years (except maybe government workers) and hence a defined benefit pension has limited, even no value. Such pensions accrue benefits based on earnings and years of employment, typically giving higher value to earnings in the last ten or less years of service. Work for ten employers for four years each and you likely get zilch.

 “According to the Bureau of Labor Statistics, the average worker currently holds ten different jobs before age forty, and this number is projected to grow. Forrester Research predicts that today’s youngest workers will hold twelve to fifteen jobs in their lifetime.” Source: LinkedIn

So, we need a new strategy. We need to recognize the faults in human nature when it comes to long-term planning, to managing money and when it comes to setting spending priorities.

Any ideas?

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6 replies »

  1. One idea I like is giving older employees a real incentive to stay in the work force longer. For workers over 62, eliminate the payroll tax for both SS and Medicare. This will boost their wage by 7.65 %. Also, by increasing the limits on amounts allowed into a 401k, and as pointed out here, especially Roth accounts, the amount of money a worker between the ages of 60 to 70 will save can dramatically increase.

    In addition, although it may be hard to believe right now, many economists believe we will be facing a serious labor shortage within twenty years. I think many older workers would stay in the workforce longer given a strong financial incentive for doing so.

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      • Maybe, maybe not. As confirmed more than a decade ago by Peter Cappelli at Wharton, there isn’t and won’t be a labor shortage. He predicted/we’ve seen a shortage of workers with specific skills and capabilities.

        So, I expect to see less competition for workers using broad based benefits like health care coverage and pension plans – programs that must be offered to most/all workers (eligibility, vesting, non-discrimination rules, etc.)

        Few employers use broad based benefits to differentiate their value proposition in seeking talent and skills. Instead, expect employers to continue to moderate the cost of broad based benefit plans while concurrently attempting to differentiate the rewards offered to “top talent” from “not so top talent” … expect to see increasing differentiation of direct compensation based on skills, performance, and results.

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  2. I agree that private IRAs and Roth-IRAs have been available since 1974 and became widely available after 1981. I just wish that the IRS would have larger limits for the IRAs. It just doesn’t seem fair the you are restrict to $6K ( $7k over age 50) compared to $19k / $25k in 401Ks. If you follow the general wisdom of saving 10% of your earnings, $6k implies that you do not have to save that much if you make over $60k a year. (A smart person would still save outside of IRAs).

    The 401K limits are 3 to 4 times greater than the IRA limits. It also seems that the IRA limits has not kept up with inflation. In 1981, I was limited to $2,500 per year, adjusted for inflation that would be $6,952.00 per year today.

    I know a lot goes into the IRS limits for the IRA and 401K, but just seems like the IRS devalues the IRAs over the 401Ks. As a taxpayer, I would prefer people to save for their own retirement vs the government having to fund additional social welfare programs (meals on wheels, heating assistance, etc) to help seniors who did not or were unable to save enough money.

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    • Don’t disagree. However, most people don’t contribute to IRAs – only about 11% of eligibles made a contribution in 2017. And, most who do contribute don’t contribute the maximum anyway. Only a handful of eligibles made catch up contributions, as well.

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  3. Median tenure according to the Bureau of Labor Statistics has been < = 5 years for workers ages 25 – 64 for over five decades. Until 1989, many, perhaps most DB pensions required 10 years service to vest. So, while 38% of private sector workers were working for an employer that sponsored a DB plan in 1978, only a minority of those workers ever vested or earned their accrued benefit.

    Ideas? Sure. It is called the IRA – a more than adequate plan that has been in place for 38 years! If your retirement is not a priority for you, it isn’t a priority for me either! Don’t ask me to fund your retirement or bail you out.

    Focus on funding the Social Security and Medicare promises first.

    Then, make sure taxpayers, most who don’t have lucrative pensions, aren’t forced to fund public sector and multiemployer pension plans. Let those workers fund their own pensions – just like the rest of us.

    Don’t bail out the management and labor folks who overpromised and underfunded.

    Don’t ask taxpayers to fund the promises politicians made to buy votes.

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