Working Through Retirement

Doesn’t sound right, does it? What’s the point of retiring if you still need to work?

That was a central question from an excellent Frontline program that aired on PBS last night. The crux of the program focused on the shift from pensions to 401(k)s in the American corporate world.

But it’s not just a lesson for the private sector. Scott Walker and others are pushing hard for replacing the Milwaukee County pension plan with 401(k) plans for county employees. I’m sure there is discussion in other public sector areas of a similar move. But, as the Frontline documentary makes clear, such a transition is not necessarily in the best interest of the employees or society in general in the long-term.

To start, 401(k) plans were initially developed in the late-1970s to serve as supplemental retirement accounts for company executives, not primary retirement accounts for a mass of employees.

Essentially what a 401(k) plan does is shift the cost and risk of retirement accounts from the employer to the employee. In traditional pensions, employees were guaranteed payments of a certain level through retirement. The funds for these payments were paid by the employer as part of the contract with an employee. The employer would also control the investment of these funds for the employee, and also take the risk if those investments failed. The pension checks were supposed to be guaranteed regardless of investment success (although companies today are finding that bankruptcy allows them to conveniently dismantle those pension guarantees).

A 401(k) plan, on the other hand, is usually funded on a matching system between the employer and employee. And the control of the plan is in the hands of the employee, not the employer (although some employers do offer to make investments on behalf of the employee). The major problem with this is that most employees are in no position to wisely invest and – most critically – manage those investments over decades. And if the moneys for retirement were invested poorly under a 401(k) plan, whether by the employee directly or through the employer on the employee’s behalf, the risk lies entirely with the employee.

The shift from pensions to 401(k)s has occurred for a number of reasons, but a couple of big ones are poor management in the 1990s and cost.

In the stock market boom of the ‘90s, a number of major corporations underfunded their pension liabilities, hoping instead that the market boom would carry the retirement accounts by itself. When the market tanked at the beginning of the current decade, many companies found themselves with an enormous deficit in the area of pensions. This has led to numerous companies claiming bankruptcy to demand takebacks from retiring or just retired employees (i.e., reduce their pension checks, often by 1/3 or more) and shift from pensions to 401(k)s for existing employees.

The issue of cost cuts two ways. One, 401(k)s are flat-out cheaper for employers than traditional pensions – to the tune of billions of dollars over the coming decade for large companies. It’s no wonder many are making the switch.

And, two, as consumers we are demanding lower and lower costs for items. This is particularly true in a global marketplace where companies are finding workers in places like India and China who will work for next to nothing in salary and absolutely nothing in benefits. If companies want to lower the cost of their products to remain competitive, a useful way is to lower production costs by swapping expensive pensions for cheaper 401(k)s.

But what the Frontline documentary makes clear is that there are hidden costs to these cheaper prices and cheaper 401(k)s. And those hidden costs for the soon-to-retire baby boomers are about to be made very clear, as many people currently in their 50s and 60s will be forced to work into their 70s and 80s in order to make ends meet. And those are the lucky ones – the unlucky will face some sort of significant medical obstacle that forces them to consider a nursing home they can’t even begin to afford.

(Experts estimate you’d need to save 15-18% of your annual salary in a well-managed 401(k) each year over a roughly 30-year period to retire comfortably. Very few Americans actually do this or even can afford to do this.)

Retirement is a very real problem that’s going to hit the mainstream real soon. Legislatively we need to alter the structure of both 401(k)s by making investments safer and corporate bankruptcy by giving employees more power in Chapter 11 proceedings.

And around the edges we can make an impact as consumers. Specifically, we can start shopping at places that are known to offer responsible retirement plans to employees. While the cost of the products may be a bit higher, the long-term costs to society will be much more affordable.

For those who have the opportunity, I highly recommend the Frontline documentary on retirement. I think the re-airings in the Milwaukee area are done for now, but it’s sure to come through the schedule again at some point. Also, you can go to the website to view it online (starting tomorrow) or see other documents from the making of the program. And if none of those work for you, the program will surely be made into a DVD that’ll be available to your local library sometime in the future.