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Wish You Had A Pension?
Ashlea Ebeling of Forbes asks, Wish You Had A Pension?:
Traditional pensions have been vanishing for private sector workers, causing untold retirement anxiety, and American workers want them back, according to a survey released today by the National Institute On Retirement Security.
Eight out of ten (81%) of those surveyed say that all workers should have access to a pension plan so they can be self-reliant in retirement. Some 84% say Americans with pensions are more likely than those without to have a secure retirement. And 58% of those without a pension say that a pension would make them feel more confident about their chances of having a secure retirement.
Too bad. Defined benefit pension plans, which provide a monthly annuity payment for life in retirement, are dead in large corporate America. But there is a revived interest in these plans among small business owners (see below).
The survey and an issue brief, “Who Killed the Private Sector DB Plan?,” were released in conjunction with a NIRS retirement policy conference today in Washington, D.C.
“American workers need a pension renaissance,” says Ilana Boivie, an economist and director of programs for NIRS who wrote the issue brief. It addresses the reasons for the sharp decline in private sector defined benefit coverage (increased regulations, fewer unionized jobs), and suggests policy changes that could help reverse the trend (creating third-party sponsorship of defined benefit plans, having employees contribute to the plans, and making pension plans portable).
It’s going to be an uphill battle. In 1975, 88% of private sector workers covered in a workplace retirement plan had defined benefit coverage; by 2005, this number dropped to just 33%, according to the Center for Retirement Research at Boston College.
And the number of workers with plans continues to drop – for example, as of Jan. 1, 2011, GE is no longer offering defined benefit plan coverage for new salaried employees. (Instead, these hires will get an automatic annual employer contribution of 3% of their salary to their 401(k)s, in addition to an employer match of up to 4% of salary. They won’t get retiree health benefits either, but that’s another story.)
While the downturn in defined benefit offerings among big employers is drastic, one bright spot the report doesn’t cover is a resurgence in interest in these plans among small employers, typically under 30 employees. Actually, the most generous defined benefit plans are the ones small business folks set up for themselves. “Defined benefit pension plans for small closely held corporations are an extremely powerful way to set aside significant amounts of retirement income in very tax-advantaged way,” says Marcia Wagner, a pension and employee benefits lawyer in Boston.
Who’s a good candidate? Company owners over 50 who want to work another 10 years or so and set aside as much money as possible for themselves and their long-term workers. The catch: you have to have the cash flow to fund the plan.
Wagner recently set up a plan for a small group of neurosurgeons who didn’t feel like their 401(k) plan was going to give them enough money to retire on. The defined benefit plan works in conjunction with the 401(k), not in lieu of it.
How much you can put away is a function of many factors including your age (an actuary calculates all this), but the doctors in their 50s are generally putting away $180,000 each a year for themselves and $15,000 a year for younger staff members on a tax-deferred basis (this does wonders for their income tax liability). After 10 years, they will probably terminate the plan, and have the option of taking slightly under $2 million each (the staff members would get $150,000 each) as a lump sum or a stream of annuity payments over their lifetimes.
“People don’t do DB plans because they think they’re ugly things, but it works very much in the small marketplace,” Wagner says.
For now, if you work in corporate America and have a pension, consider yourself lucky.
Consider yourself lucky if you have any pension at all. But while some are calling for the "death of pensions," I see pensions making a comeback in the future. There will be a political push to find an affordable and practical solution to the ongoing retirement crisis, and I think it's premature to call for the end of DB plans. In fact, smart companies will be looking at ways to attract workers by provided them with a solid DB pension plan.
On this last point, Dean Baker, the economist who predicted the US housing crash long before everyone else, posted a nice piece on Monday, Public Pensions 101:
With the recent spate of attacks on climate science and evolution it should not be a surprise that traditional defined benefit pensions in the public sector are now also under attack. There are powerful political actors in this country who are anxious to build a bridge back to the 19th century; taking us to a time where working people enjoyed few protections and could not count on sharing in the gains of economic growth.
The effort to weaken or destroy public sector unions and take away their pensions is the latest battle in this larger war. As usual, the right has been busy making things up to push its agenda, confident that the media will not expose untrue claims.
At the center of the right’s story is the view that governments are somehow being reckless or irresponsible when they provide guaranteed pensions for their workers. They tell us that these guaranteed benefits will bankrupt state and local governments, imposing impossible burdens on future taxpayers.
This story can be easily shown to be untrue. While the right has been scaring the public with talk of a trillion dollars in unfunded liability in state pensions, this sum can also be expressed as about 0.2 percent of state income over the timeframe in which the liabilities will have to be paid.
In other words, if states raise 20 cents in taxes or cut 20 cents in other spending for every hundred dollars of future income, they will be able to meet their current pension obligations. This is not a trivial sum, but it doesn’t seem likely to bankrupt our youth either.
Furthermore, the vast majority of this shortfall was due to the plunge in the stock market that followed the collapse of the housing bubble. Overly generous pensions were not the problem. The problem here were the greedy Wall Street types who profited from the housing bubble and the incompetent economists who did not see it. Of course the market has recovered much of its losses, so future years’ pension reports are likely to show that most of the shortfall has already been eliminated.
But it is important to understand the basic logic of defined benefit pensions, since many are trying to eliminate them altogether. Defined benefit pensions are in effect a form of insurance. They guarantee workers a level of retirement income based on the years that they work.
This guarantee of future income is more valuable to workers than getting the same amount of money in salary since it would be very expensive for workers to buy the same insurance from the financial industry. From the standpoint of the government, the insurance is virtually costless.
State and local governments will survive into the indefinite future. If the stock market is down any given year or set of years there is little consequence for a government offering a pension fund. Of course, a down market would be devastating for an individual worker if it happens at the point where he/she retires.
This simple logic means that governments can give workers something that is of great value – a guaranteed retirement income – at very little cost. (Research shows that even after adding in pensions, health care and other benefits, public sector workers are paid slightly less than their private sector counterparts.) This means that because governments offer defined benefit pensions they can either attract better workers at the same pay, or the same quality workers at lower pay, than if they did not offer pensions. This is as basic as economics gets.
Not offering pensions would be comparable to a company that had beautiful grounds, with a lake and woods, and then telling workers that they could not use them. Obviously workers would value being able to bring their families to swim at the lake and hike through the woods.
When considering different job opportunities many workers would be willing to forego somewhat higher pay to work at a company that gave them access to such facilities. If there was little cost to the company to make its grounds available, it would just be shooting itself in the foot by closing them to its workers. This is the story with defined benefit pensions; although the issue is far more important since it involves the retirement security of workers and their families.
Most private sector workers formerly enjoyed defined benefit pensions, but these pensions in the private sector are now a fast dying relic. Rather than bring about a downward leveling by eliminating defined benefit pensions for public employees, it makes more sense to take steps to re-establish defined benefit pensions for all workers.
Defined benefit pensions did not create this economic crisis. Citigroup, Goldman Sachs and the other giant banks did. It says a lot about the state of politics that these too-big-to-fail banks seem likely to survive the crisis, while defined benefit pensions may not.
I don't agree with that last point and have discussed my views in an earlier post, The Blame Game. But there is a movement to weaken or eliminate public pensions and it's quite disconcerting. We need reforms but we don't need fear mongering and policies that make no economic sense for the long-term health of our retirement system. On that point, I completely agree with Dean Baker. Millions of people only wish they had a pension. Now is not the time to attack those that have one.
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My neighbor and I were equally educated and as far as I am concerned, the State Department has not been (or is now) such a successful organization that they should pay their 'workers' this kind of salary and pension benefits. I do like my neighbor, but he is 'beggaring his neighbor'.
The organization he worked for took my Social Security contributions, and year after year spent them ... should I have invested them myself, I would have a reasonable pension now.
The Government has been an abject failure in doing what it was constitutionally chartered to do.
I resent paying top dollar in pension benefits for 'relatively' incompetent people.
When the average Federal employee makes twice as much as the average private sector employee, I see no need to subsidize these folks in their golden years. When the average State or local worker makes 70% of their highest year salary in retirement, I see no need to support their lifestyle when their investments turn south. My grandchildren should not be held responsible for political excesses.
Yes, I want a pension but not as much as I want to 'not' pay for for someone else.
I keep hearing crap about how state/local employees have it so good.
That's bullshit.
My wife is a state employee. Her medical benefits (of which she has to pay for) aren't all that great. The dental is really bad. And she makes less than she would in the private sector.
I have to wonder how much other false info is out there to pump the destruction of protection of people that actually work for a living.
"And she makes less than she would in the private sector." I call bullshit.
From the article: "Americans workers need a pension renaissance."
I need a unicorn renaissance and if the author would toss in a pot of gold at the end of the rainbow, I'm good with that too.
There is not enough wealth for all Americans to have the upper middle class standard of living they have come to expect starting at age 65. This is especially true for the Boomers. But that's only a matter of degree. The only generation for whom that worked was the parents of the boomers, who rode on an unusual demographic wave--lots of boomers working to support each of their parents in retirement.
Articles like this are just continuations of the social security ponzi that our Ruling Class has run for the past many decades. The promises made are either dishonest or stupid. The "trust funds" will be spent for the benefit of the Ruling Class the way the SS trust fund has been spent. Perhaps "looted" would be a more honest term.
Even if there were enough wealth for all to retire in comfort, there is no solution in our political system that allows large amounts of wealth to be accumulated long term for the benefit of the general citizen in retirement. That money will be grabbed by Congress and spent long before the citizens retire. Or it will be dissipated by pension fund managers or the companies who set them up.
Can any person, viewing the sad history of social security and private pension funds, really think there is a solution, within our political system that does much more than promise (not provide) a secure retirement to everyone in exchange for current votes and/or current wealth and power?
Temper tantrums, such as the amazing riots by what amounts to the government against the government in Wisconsin, will not change that. Even if the public employee unions regain complete control of the government there, they cannot manufacture money out of nothing. The only issues are: (1) How are people going to get less in retirement than they expected (some of the ways this will occur are increased retirement age, cut in benefits, reduction in pensions, bankruptcy and default, confiscation of 401k's explicitly or by way of inflation)? and (2) Do some groups have enough power to have relatively less taken away from them than others (answer, probably so, eg public union members will do relatively better than others because they can fund and organize riots)? and (3) Will our current form of government survive the upheavals resulting from these issues (who knows. The most likely outcome is a long socialist/fascist twilight while other, more vigorous cultures pick apart the pieces)?
You'll get a defined benefit ! $150.000 a year ! Which you will be able to use to buy one bicycle. Without a stable unit of monetary value there is no defined benefit. What happened to the Russian workers with a million rubles saved in the bank for their retirement ? Look it up. The French, twice in one century, the germans, the Mexicans and other Latins, recently, what happens to your plan? and your savings when the unit of account goes bye-bye? hmm.? Silver will continue to be spendable; it can always be converted into the "currrency of the day", and spent. Always.
"the average Federal employee makes twice as much as the average private sector employee"
Averages are misleading. The Feds continue to outsource low paying service jobs, the kind held by the "average private sector employee" Meanwhile the average Federal employee has a degree, and/or is managing non federal employees or contractors.
Prove it! I find it hard to believe that the average public sector worker makes twice as much as the average private sector worker. And as far as pensions, it comes of the paycheck of public sector workers. It's not given to them for free!
No, Leo, it doesn't come from the "paycheck of public sector workers." It comes from the tax payers.
Public sector pensions are the result of extortion.
Private sector pensions should be outlawed as against public policy because nobody is in a position to guarantee the future, and when these promises are defaulted upon, the taxpayers are stuck with the bill via welfare programs and bailouts.
Umm...from http://www.wisconsin.edu/hr/benefits/retsav/wrs.htm
And for the record, that is a straight copy and paste from the website...I did not add the emphasis.
Granted this is just one example from one public institution, but I believe it helps illustrate just how flawed your statement is. I'm not saying all public employees pay nothing into their plans, but they damn sure don't pay for all or even a majority of it...and since they are public sector employees, it's ultimately all tax dollars anyway.
More like 55%
http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm
In the head to head analysis, job by job, the most deviation was:
Public relations manager Government: $132,410 Private: $88,241
They are not doing a very good job ... I think they should be let go.
http://images.usatoday.com/news/graphics/2010/2010-08-10-fedpay/fedpay.jpg
Federal avg salary $81,258 + benefits $41,791 = $123,049
Private avg salary $50,462 + benefits $10,589 = $61,051
Thanks those are very helpful stats.
Even if we go with Bear's stats, we see that in 2009 the private sector average was slightly less than the state and local government average. That was after the crash, go back three years and it might have been different.
Plus if federal workers earn more, how on earth does that justify attacking "public sector pensions and benefits" as one group? These are the lies that they tell in Wisconsin.
I grant you the point (Federal workers only ... +13% for State and local) ... statistics show that the average US Federal worker makes $123,000 per year (including pension benefits) ... the average US worker makes $61,000 (7.5% is contributed to Social Security which may or not be payable).
I'd rather work for Uncle Sam with lifetime job security, ever increasing salary, in a growth industry.
Source is USA Today: http://www.usatoday.com/money/economy/income/2010-08-10-1Afedpay10_ST_N.htm