The pension plan is unsustainable! Who says?

American Express started its pension plan in 1875. The company where I worked for forty-eight years has a pension plan that began in 1911 and yet today we hear that traditional defined pensions are unsustainable, they are too expensive and create large liabilities.

What has changed since the days of doing the right thing for workers? These older plans started long before government involvement for one thing. Prompted in part by the failure of the Studebaker company (there’s that auto industry again) Congress passed ERISA in 1974. It was supposed to protect workers from pension failures and funding shenanigans. To some extent it accomplished that, but also made the operation of a pension plan so complex and costly the idea of starting a new plan quickly faded and the gradual demise of these plans was assured. The public sector became the last bastion of a traditional pension but is now plagued by politicians failing to fund unaffordable promises.

Another key factor in the shift from a traditional pension to the 401(k) type plan was the changing relationship between employer and worker. The idea of working for one company ones entire working life became an anathema; moving to a new job every few years was the path to opportunity. The decline of strong unions added to the mix.

In the 1980s consultants began convincing employers that employees did not appreciate pensions, they didn’t understand them and they couldn’t see the value. Besides we were told, workers weren’t going to stay long enough to benefit from a traditional pension, they needed something more visible and portable. Hence we moved from defined benefit pensions to hybrid (think cash balance) plans and ultimately to defined contribution plans like 401(k), 403(b), IRAs, etc.

It didn’t take long to learn that workers didn’t understand these new plans either nor did they understand the responsibility that was being thrust on them. As a result, the youngest of the baby boomers and later are screwed … Hey, let’s tell it like it is.

In order to have the kind of retirement most people want, including keeping up with inflation and rising health care costs (and they will continue to rise), all one has to do is save enough, invest correctly, manage the labyrinth of stocks and bonds, hope the market doesn’t crash just before you retire or anytime after you begin withdrawals from your retirement account, withdrawal at the correct rate in retirement and plan for ones surviving spouse. The other option is to save so much you can invest all your money in safe insured savings and survive on the pittance in interest… Good luck with that.

Investors feel powerless.

How’s that for making your pension value visible, understandable and portable? Sadly many (I’ll go out on a limb, most) people cannot handle all the issues in the previous paragraph.

Take a look at the results of two new studies here.

Now that our collective corporate and policy experts have gotten us into this mess, what do we do? There is a simple solution; work longer or just never retire. I wonder how corporate America will react to a workforce navigating the factory floor or corporate halls in those “free” scooters we hear so much about on television? I bet the cafeteria will have new menus when the average worker age reaches 80. Is there a senior discount?

Let’s face it, all seniors of the future are going to need an annuity stream of income to have any chance of a reasonable retirement that maintains their lifestyle. Social Security alone won’t do it unless you can meet your goals on 40% or so of your former income. There are two possible answers. We add a new component to Social Security that permits additional voluntary worker contributions to boost ones ultimate benefit (but gives more cash to Congress to “borrow,”)  or we add new and automatic annuity features to that plans we have. Perhaps the employer match in a 401(k) or 403(b) plan only buys an annuity. Perhaps those individuals with cash balance plans can only take a portion of their balance in a lump sum with the remainder paid in the normal form of benefit which is an annuity.

The idea that people will either save enough or effectively manage a lump sum distribution to have a secure retirement is overly optimist and there is plenty of evidence to support that. Employers who abandoned pension plans or cut 401(k) matches have shot themselves in the foot. In years to come workers will not be retiring and those that do will not be able to buy the goods and services that keep our economy growing.

An annuity pension is not only sustainable, it is essential.

Poverty rates for older Americans once again on the rise.