You can pretty much take your pick of which study or survey to believe about the state of retirement savings; they all have a dismal story to tell.
So what is the answer? How do we solve this? In some ways we seem to be reverting to pre 1935.
A National Institute on Retirement Security report is a good example. Consider these findings:
1. Account ownership rates are closely correlated with income and wealth. More than 38 million working- age households (45 percent) do not own any retirement account assets, whether in an employer-sponsored 401(k) type plan or an IRA. Households that do own retirement accounts have significantly higher income and wealth—more than double the income and five times the non-retirement assets—than households that do not own a retirement account.
2. The average working household has virtually no retirement savings. When all households are included— not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households. Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement.
3. The collective retirement savings gap among working households age 25-64 ranges from $6.8 to $14 trillion, depending on the financial measure. A large majority of households fall short of conservative retirement savings targets for their age and income based on working until age 67. Based on retirement account assets, 92 percent of working households do not meet targets. Under broader measures, most households still have insufficient assets: 90 percent fall short based on retirement account balances and estimated DB pension assets combined, 84 percent fall short based on total financial assets, and 65 percent fall short based on net worth.
4. Public policy can play a critical role in putting all Americans on a path toward a secure retirement by strengthening Social Security, expanding access to low-cost, high quality retirement plans, and helping low income workers and families save.
Social Security, the primary edifice of retirement income security, could be strengthened to stabilize system financing and enhance benefits for vulnerable populations. Access to workplace retirement plans could be expanded by making it easier for private employers to sponsor DB pensions, while national and state level proposals aim to ensure universal retirement plan coverage. Finally, expanding the Saver’s Credit and making it refundable could help boost the retirement savings of lower-income families.
That’s a pretty sad tale and does not bode well for the future. Part of this is the fault of larger employers who have abandoned defined benefit pensions and others who do not provide or provide meager 401k plans. The major problem, however, is the live for today, irresponsible attitude of all too many Americans; that and a lack of fiscal discipline and knowledge.
Ironically this fact supports the idea that forcing savings by raising the Social Security payroll tax and benefits (after we solve the current deficit in the Trust) may be the only viable way to save many Americans who just don’t plan for the future. 😴 Don’t tell old Liz I said that😜
Financial education must start in the schools from the early ages and growing more sophisticated through high school.
QUINNSCOMMENTARY 
” So, suggesting that the reason we have a “so-called” crisis was in part because of corporate actions that prospectively changed DB accruals or froze existing plans is simply misleading.” : So writes BenefitJack. Logical conclusion: Actions that prospectively changed DB accruals or froze existing plans played no part. No part at all. Move along. Nothing to see here.
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Sure, for the small minority of Americans who had a lucrative DB plan, to see accruals frozen or prospectively reduced was never a good thing. But, how did they respond? The answer is that most didn’t respond. The larger majority never had a DB plan, and they didn’t save either.
Frozen DB accruals and DB plan terminations are not the primary, nor even a major reason why we have a lack of financial preparation for retirement among the 76+MM baby boomers (born between 1946 – 1964). The authors of the study Dick quoted always make it sound like everyone had a final average pay defined benefit pension plan, with a 2.0%/year of service accrual rate (integrated), substantial early retirement subsidies and automatic post-retirement COLAs, and retiree health coverage too – because that is what some public employees, and a few major corporations offer (or once offered).
However, the majority of the decline in DB participation is among small employer plans – not the ones that make headlines.
And, most of those employers who promised substantial DB benefits and retiree health coverage never agreed to fully fund their pensions nor to establish available retiree medical funding vehicles – let alone fully fund them. ERISA NEVER required that action. So, maintaining those significant accruals were ALWAYS contingent upon investment rates of return of 8+% of more per year. You see these lies for what they are very clearly today in the multiemployer plan sector and in the public employee sector – in places like Illinois, California, Detroit, etc. and multiemployer plans. See: http://www.plansponsor.com/PBGC-Deficit-Balloons-Due-to-Multiemployer-Program/?p=2
PBGC surplus/deficit data are a great indicator of this ruse. You can quote me: “Pension promises without funding are mere dreams.” For plans that have terminated, PBGC’s unfunded liability was estimated to be a $7B SURPLUS in 2001 but has now ballooned to a $62 Billion DEFICIT in fiscal 2014. Much of that was the result of the Great Recession – the dramatic hit to pension plan balance sheets from investment losses, as well as financial difficulties of the plan sponsor(s). In 2014, the deficit in the PBGC’s insurance program for single-employer plans fell to $19B, down from $27B (2013) due to favorable investment returns, however, it was more than offset by losses among multiemployer plans, now $42B, up from $8B in fiscal 2013. The jump in liability was acknowledgement that these multiemployer plans were never funded appropriately nor adequately.
To make my point, most of the DB terminations were among smaller plans (which is why big plans make such headlines, even today). In fact, the number of participants in DB plans is only down 10% from the number of participants in 1975 (change in survey data).
– 1975 (Form 5500 data): 33MM in DB’s, 12MM in DC plans, 45MM total participants (unknown overlap)
– 1990 (Form 5500 data): 39MM in DB’s, 38MM in DC plans, 77MM total participants (unknown overlap)
– 2010 (National Compensation Survey): 30MM in DB’s, 54MM in DC’s, 66MM total (18MM overlap)
Of course, as a percentage of the population, the decline is significant.
However, why haven’t the baby boomers responded? I think they are lying to themselves. Consider the EBRI’s retirement confidence survey – which 10 years ago (2006) started to focus on this issue:
“… Only 40 percent of workers indicate they or their spouse currently have a defined benefit plan, yet 61 percent say they are expecting to receive income from such a plan in retirement. Likewise, workers are as likely to expect (37 percent) as retirees are to receive (40 percent) retiree health insurance through an employer, despite the fact that the number of employers offering this benefit is declining….”
No, freezing accruals and terminating DB plans has only played a minor role in the lack of boomer preparation, our so-called current “crisis”. Failure to save is the main reason – swamping all others.
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I believe the inevitable shortfall in Social Security will be solved by Congress. Unfortunately when it happens, which will likely not be for another ten years, payroll premiums will be “enhanced” , retirement age extended, and benefits to be means tested. The solutions will be more onerous than they would otherwise need to be because the Congress will have waited so long.
Regarding BenefitJack’s comments about not picking on the pow widow corporations, it made me laugh. Thanks for the smile on a Sunday morning.
The fact that a majority of workers were not vested in a defined benefit plan does not contradict the fact that most of those who did, either dropped their plan, decreased benefits of their plan, or converted to a defined contribution plan. This happened while top executive pay hit heights never before seen. I’ve lived in some cities where golden parachutes in the sky outnumbered the other birds of prey.
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Regarding Social Security you are so right. Congress has been warned and urged to act for many years by the Trustees. Ironically, the Trustees are comprised mostly of members of them then current administration and still they are ignored. 😏
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You miss the point. For a super majority of Americans who have retired since ERISA, 1974, retirement preparation was not about accumulating significant benefits from a Defined Benefit retirement plan. So, suggesting that the reason we have a “so-called” crisis was in part because of corporate actions that prospectively changed DB accruals or froze existing plans is simply misleading.
Prior to the 1970’s, retirement happened for most Americans when they were physically spent and unable to work any more. Work was much more physical. Retirement periods were brief, maybe an average of 10 – 15 years, maybe less. So, people worked all their life, perhaps into their mid-60’s if they were otherwise healthy, stopped working when they could no longer cope with the challenge, retired to a sedentary existence, lived a few years and died.
That was a retirement crisis!
But, as a short period, most could retire with meager savings, perhaps home equity in some situations, Social Security, Medicare after 1964, etc. You may recall, or maybe not, the group of Americans (as a percentage, not in numbers) who were most likely to be in poverty – prior to the 1970’s – that was the elderly. In 2013, 19.9% of children under age 18 were living in poverty, while only 9.5% of individuals age 65+ were living in poverty. For comparison, in 1974, the percentages were 15.4% (children), 14.6% (age 65+) and in 1966 (first age-based data on file at the Census bureau), 17.6% (children), 28.5% (age 65+)!!!! Turns out, if you look at the elderly today, at least based on official government poverty statistics, compared to the rest of the population, many are doing just fine.
Corporations aren’t “poor”. But, thankfully, they retain the right to prospectively change their pension accruals to meet changing circumstance. You and I may not agree with their actions, however, I have been there and, at least with respect to firms where I worked in HR/Benefits Planning, 3 of 4 would likely have continued more lucrative DB plans but for government regulation – the alphabets, TEFRA, DEFRA, REACT, TRA’86, ADEA, OMBRA, PPA, etc. as well as a slew of changes in accounting processes.
Ask Dick. I suspect he would agree that we have never had a national retirement policy in America, we have only had a revenue, or tax policy when it comes to pensions and retirement. The federal government thinks all of your money belongs to them, then they allow certain “tax expenditures” – such as IRC 401(k), IRC 401(a), etc.
Bottom line, if you seek to limit a corporation’s ability to prospectively change accrual rates or other such progressive ideas, corporations would not have adopted defined benefit pension plans in the first place – both pension coverage and accruals would have been significantly less (execpt for executives, of course), and you will soon have France where the social insurance system really does carry the ball for all but the executives.
You may want that for your pension if you are an executive, but I doubt others want that, or any of us want that for our economy.
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I think you view this too legally and not enough ethically. While you are right that the majority of Americans never had a DB pension, what has happened to the 40% or so that did most certainly is contributing to the coming crisis. I replaced a traditional DB plan with a cash balance plan back in 1996; those employees hired since then now have to save more to meet retirement income goals, not to mention they also do not have any retiree medical.
When a company makes a commitment legal or otherwise it should honor it and not change it to have retroactive negative affects, especially when the reason for doing so was based on temporary situations such as during the recession.
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Sorry, Dick. What is a pension? It is a written plan document, a contract, govered by ERISA (which would be govered by state contract law but for ERISA). There is no “ethics” here. You think there is a moral violation in applying the clear, written provisions of the pension plan written document/contract with regard to no guarantee of future accrual rates? Again, as I have mentioned many times, if the employer had intended to vest people in the current accrual rates, they could have put that provision in their plan. Again, as I have mentioned many times, if the employer had intended to provide the same pension benefit accrual prospectively, nothing stopped them (particularly after PPA 2006) from funding to ensure that occurred. If corporations wanted to make comparable committments, a la european pension plans, they could have done so. That they did not should make it clear that they intend to deliver on the promise actually made (except when they dump liabilities onto PBGC, a la United, which paid about $60MM in PBGC premium and dumped $6B in unfunded liability on other pension plans).
They did not. Contrast that with public employee plans. You want a “crisis” – go no further. Today, we are starting to see cities, counties and states curtail government services so as to have enough money to fund the pension and retiree medical promises made in the past.
From another blog I read: “… For years, state and local politicians have been promising public employees greater pension benefits, but they’ve neglected to ensure that sufficient funds will be available to make good on those promises. Consequently, a huge financial crisis is on the horizon, and in response governments throughout the United States are raising taxes and cutting back their services. … the states facing the largest estimated shortfalls include New Jersey, Ohio, and Texas, each with unfunded pension debts of more than $200 billion; Illinois and New York, with shortfalls greater than $300 billion each; and California, whose pension gap is estimated between $550 billion to $750 billion. In addition, many cities and counties face a similar financial crisis. See: Pension Payments Are Starving Basic City Services, by Lawrence J. McQuillan (The Sacramento Bee, 5/28/15) See: California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, by Lawrence J. McQuillan
Finally, why should pensions be different than employment? Would you argue that an individual “owns” her position so long as she performs adequately? Or, would you agree that where the employer is “at will”, the employee and the employer can, at any time, terminate the relationship, including future pension accruals? Or, do you believe there is an “ethical” issue with at will employment, too? For comparison, do you believe that when a long service employee is involuntarily terminated, or where the employer must reduce future accruals, that such changes should be conditioned on the provision of a retirement incentive, a “buy out”, that puts the long service worker in the position she would have had but for the employment action?
An early retirement window “entitlement” where there was changing circumstance wasn’t in my employment “contract”. It probably wasn’t in your’s either.
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Stop picking on corporations.
If you look at EBRI and EBSA data, you will see that the majority of Americans never vested in a defined benefit pension plan accrued benefit. Period. Never.
Vesting was more prevalent once TRA’86 took effect in 1989, to change to 5 year cliff vesting, but even then, the majority of Americans never vested in a DB benefit.
There is this myth that everyone used to work for an employer who offered a defined benefit pension plan. And, the myth goes way beyond access, too. The second part of the myth is that the DB plan that was in place also always offered great value.
I had an executive who once complained to me that he did not like the fact that I had to make significant PROSPECTIVE changes to DB plan accruals and provisions. He was a pension actuary – so, he knew the value of his pension and how to max out his accruals, early retirement subsidy and post-retirement COLA. He said – all I want is the pension you promised me when I was hired.
So, I looked it up, saw that he was hired in 1968, and agreed to change his pension benefit to the benefit he accepted at the time of hire:
– Entry age 35,
– 2% per year employee contribution,
– Coverage compensation = base salary only
– Career average pay formula
– No early retirement subsidy
– No automatic COLA after retirement, but a variable annuity where, based on plan investment results, the pension benefit could increase OR DECREASE.
– Rule of 45 vesting.
I actually presented him a calculation of his benefit – based on the plan in effect at hire and his current benefit, after the reductions in prospective accruals.
No, no he said – I want the benefit “you” promised, the benefit that had grown significantly in value over my 30+ years of service, the benefit that included all of the improvements after 1968 (supposedly, he states, the only reason why I continued working here), focused solely on plan provisions that would have been a high point in accruals – you would have thought he was a Chicago city employee. Here is what he thought he was entitled to, based on various provisions in place at various times during the period 1968 to 2001:
3 year final average pay with various forms of spiking wages
Maximum 40 years of service
Coverage compensation = base salary and annual executive bonus payments
Entry after 1 year of service
5 year vesting
Significant early retirement subsidy
Automatic post retirement cola – typically 3% per year starting in the year after separation.
Stop perpetuating myths about defined benefit pension plans. I stopped long, long ago.
One of the founders at a company I used to work for famously (for us) stated: “We have within our own hands the tools with which we can fashion our own destinies.” So it is with income replacement in retirement – at least since Presidents Reagan and Bush II. They signed into legislation access to (and then enhancements to) the lowly individual IRA. The maximum contribution limits were:
1981 – 2001 – $2,000
2002 – 2004 – $3,000 ($500 catchup)
2005 $3,000 ($500 catchup)
2005 – 2006 – $4,000 ($1,000 catchup)
2007 – 2008 – $5,000 ($1,000 catchup)
2008 – 2012 – $5,000 ($1,000 catchup)
2013 – 2015 – $5,500 ($1,000 catchup)
An individual who started working in 1981 at age 21, and who has contributed the maximum, assuming a 6%/year earnings rate, would have accumulated $269,000+ by today (age 54), and assuming no change in the indexed contribution limits from 2015 levels, will have accumulated $700,000 by SSNRA 67. Coupled with social security, that should be enough to “skimp by” in retirement.
For those hired in 2003 or later, we also have the solution that involves saving for post retirement medical costs – the Health Savings Account.
Simply, retirement is not a priority for many Americans – compared to American Idol, Monday Night Football, vacations, etc. For those Americans where it is a priority, they seek out employers who still offer defined benefit pension plans, retiree medical programs, 401(k) plans, and they participate – and they are successfully preparing for retirement.
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Not picking on corporations. However, those who do or did offer a DB plan have indeed frozen, converted them or otherwise cut back on the “promise”. My own company changed the formula prospectively for employees there 20-30 years with the result the benefit they thought they were going to get was now thousands less a year, in some cases $10,000 a year. All this when twenty years ago new hirers were put in a far less costly CB plan. If that isn’t an example of pulling the rug from under people I don’t know what is. We all know barely 40% of Americans ever had a DB plan, but that doesn’t excuse what many larger corporations have done with pensions or are doing now when it comes to retiree medical and suddenly making them DC plans after a person retired.
In addition, I did say the most of the problem lies with the individual just as you concluded.
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