America is facing a retirement crisis. This is something (most) everyone can agree on. But why? Why is America facing a retirement crisis when in the 80's, everyone was promised that the magical fairy dust of the markets would work wonders with 401ks, so much so that people would be losing money with traditional pensions?
Because 401ks were never meant to be a primary retirement vehicle, and as a primary retirement vehicle, they don't work for the vast majority of people. They work for Wall Street. That's why.
Pensions, on the other hand, were created to be a primary retirement vehicle. They were designed from the start to provide stable income to retired individuals.
Let's take a closer look below the fold at why America needs to go back to them.
As I note above, the 401k was never meant to be a primary retirement vehicle this is something most people are not aware of. Instead, 401ks were created to be a supplement to executive retirement compensation in the 1970's.
In 1980, a HR consultant named Ted Benna came up with the idea for the modern-day 401k after hearing employers complaining that they wanted to pay less for employees retirement. But even in his own words today, they don't work as he intended. In fact, he refers to it as a "financial product that took off" rather than a pension replacement.
Those of us that were around in the '80s remember the hype: The "Decade of Excess", in a culture that brought us the yuppie and where movie anti-heroes told us that "Greed is good.", had everybody seeing dollar signs. Many bought into the hype of "optional" 401k plans making them richer than their wildest dreams in retirement, while plain old pensions would simply leave you in the poorhouse with their slow and steady monthly payments. Many people don't remember the hype (or were too young to know about it), forget or never knew that pensions were once viewed so negatively compared to a 401k. This is why it has become so easy for so many to attack pensions today - they forget the history. It should be said that the negative views of pensions by workers in the 80's ("They're crappy, low return investments!") versus the negative views today ("They're golden parachutes!") present an interesting dichotomy: Yesterday, people thought of pensions as holding them back in retirement, while today, people wonder why they can't enjoy the same kind of stable retirement their parents and grandparents did.
The reason why people today can't have the same kind of stable retirement as their parents and grandparents is pensions - or lack thereof. Retirement in American used to rely on the "3 legged stool" of retirement: pensions, individual savings, and Social Security. Today, with the primacy of 401ks, what we see is an item that was supposed to be one of the legs of the stool (personal savings) now replace 2 different legs (pensions and personal savings). I dunno about anyone else, but the last time I tried to sit on a stool with less then 3 legs, it didn't work out very well.
This is the problem. Let's face it, when it comes to investing, most Americans simply don't have the time to learn how to do it correctly. Even for those who have the time to learn how, not everyone is bright enough (or lucky enough) to do it well. Even the "experts" (if you can call the gambling class on Wall Street "experts") get it wrong often, with many failing to even beat an index fund with any regularity. So how is the average, working class American supposed to be able to do this successfully?
They're not. It's all part of the game.
Wall Street knows the average American likely won't be a savvy investor. They also know if the average American isn't a savvy investor, that average Americans loss will be their gain. Add in management fees that can significantly reduce the balances of accounts of even those who are investing well, and it's a game rigged by Wall Street to fleece Americans of their retirement savings.
Pensions are different. You don't need to know how to invest. You don't need to worry about fees. Your retirement is secure, because you know you'll be getting a fixed amount every month.
None of that is magic. You don't need to know how to invest because in the trustees of the pension trust fund do it for you - it's their job. Fees are non-existent because most pension trust funds are managed largely in-house, and even if funds are sent outside to be managed, trustees have a fiduciary duty to ensure they're as low as possible, and due to the amount of money they can invest, can demand far better fees than any investor could do individually. They spread the risk of retirement savings out amongst all employees and with the employer. Sounds perfect, right? It should. They functioned as an effective and efficient primary retirement vehicle for over a century.
But what about today? Very Serious People run around with their hair on fire talking about how pensions are "ponzi schemes" and how "unaffordable" they are. Are they? Since they worked well for over a century, what changed? Nothing. Except for a change in attitude by employers and a resignation by employees that pensions are anachronisms.
So sure, crazy financial pundits on TV wielding baseball bats will scream about how pensions are "ponzi schemes", but if they think a pension is a ponzi scheme, they're idiots, because they function in no way like a ponzi scheme. Instead, the real reason why they scream is because having to fund a pension might drop a companies stock price by a few points, thanks in large part to that very modern American concept of "treat your employees like crap and compensate them like dirt." Hooray capitalism!
"But pensions are always floundering and underfunded!" some will say. Really? No. Pensions fail for just two reasons: Bad management and/or failure to properly fund them with the required contributions in a timely manner. This is no different than a 401k or any other retirement vehicle: If you invest poorly or don't fund it in a timely manner and give that money time to grow, it flops.
"But pensions are expensive!" some will say. Are they? Are they really? No. Not when they are funded properly and managed efficiently while making wise investment choices. Let's put it in the perspective of the average 401k match, which in 2013 was 4.1%: It is not unheard of for a properly run, properly funded pension plan to have a long term ECR (employer contribution rate) of 8%.
How do I know this? Because I'm one of those lucky enough to still have a pension. It's one of the best run, best funded pension plans in the nation - the NYSLRS - and it's projected long term average ECR, even after the losses of the recession, are expected to be about 8% as per plan actuaries. The 30 year historical average is actually less than 8%.
Sure, that's double the 401k average. But is it "unaffordable?" Not by any means. It certainly reflects that if the will is there to properly run, manage, and fund pensions, Americans could return to them as primary retirement vehicles without bankrupting the nation, because with todays fat bottom lines for corporate America, few could say they couldn't afford an increase of 4% of payroll costs. Shit, for that matter, before the recession and the "Shut up and just be thankful you have a job!" nonsense of today, 4% might have been the cost of a normal annual raise for many businesses.
"But why should an employer have to shoulder any of the risk of retirement?" one might ask. Why? Here's why:
How about retaining employees for longer periods so they retain institutional knowledge? Turnover costs money, turnover costs time, and turnover costs knowledge. Pensions reduce turnover significantly. Pensions are the reasons why your parents and/or grandparents spent their entire careers working for just one company, and lack of pensions is one of the reasons why todays workforce bounces from job to job.
How about sharing some of the wealth with the employees? How about addressing wealth inequality? It's my firm belief that lack of traditional pensions for the average American worker is a driver of the wealth inequality we see today.
How about just plain showing respect and admiration for your employees, without whom, you couldn't exist as a business? Seems self explanatory.
Finally, how about because 401ks aren't working, and unless we want to revert to starving seniors and almshouse from the 19th and early 20th century, we need to address this issue.
Let's face it: even some 401k rah-rahers like Forbes admit that we're facing a looming retirement crisis. Of course, not everyone will agree, like this article on Bloomberg - and the expected citation of a conservative think tank (The American Enterprise Institute), where even the author admits that our replacement rate for income in retirement is below the norm for the OECD (and as such, I have no idea how the Bloomberg author thinks the AEI study confirms his hypothesis that 401ks are working, but the propensity for cognitive dissonance from righties is an entirely different topic).
In an era of record corporate profits and Gilded Age levels of income inequality / wealth inequality - and in an era where the remaining pensions are attacked mercilessly - it's not that America can't afford pensions. It's that America is making an active choice to throw workers on the trash heap when their usefulness is up, all in the name of vague, so-called "patriotic" concepts like "personal responsibility." It's far too easy for some of our more callous fellow citizens to blame an individual for doing something wrong, even when they've done everything society told them they were supposed to do. They worked hard for decades. They saved, and saved, and saved. Then Wall Street tanked due to it's own malfeasance and left that person who did everything "right" penniless. Who's fault is that?
In 2014, when remaining pensions remain increasingly under attack, and those who no longer have them increasingly think with a bucket of crabs mentality, the problem isn't that some people still have pensions. It's that most people don't have pensions. That is the problem that needs addressing. The bucket of crabs mentality will only serve to exacerbate the coming crisis.
Rise up and demand pensions back America. You built this nation, and you make it run - therefore, you've earned it. And while you're at it - form unions again too. They'll help you fight to get pensions back, help you hold your employers feet to the fire in keeping it properly funded, and they'll help you keep that pension when your employer threatens it simply to enrich the shareholders.
UPDATE - 1/5:
There has been a lot and back and forth in the comments of this diary on whether or not people even want pensions. HM2Viking, in the comments, has provided this link to a presentation by Teresa Ghiladarcci that reflects people do indeed want pensions when surveyed. Not only that, but they want the government to insure them.
If you don't want a pension, that's fine. But what you and the people you personally know want doesn't necessarily indicate what Americans as a whole want. No where in this diary do I suggest you be forced to accept a pension if you think 401ks work for you. That being said, I will no longer be addressing comments of this nature in the replies in defense of this diary. Your choice is your choice. Others obviously feel differently.