Pension Debts: The Next Financial Mess?
Author Roger Lowenstein says aging boomers plus paltry savings make for a coming crisis
In his latest book, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego and Loom as the Next Financial Crisis, journalist Roger Lowenstein explores America's deeply flawed retirement system. He talked with U.S. News about solving this major economic conundrum. Excerpts:
How bad is America's retirement situation?
It's dire from two perspectives. One is the people who'll be funding the burden. General Motors doesn't want it. The states have a cumulative deficit close to $1 trillion. The other side is these institutions telling retirees to take on the burden. Guess what? Individuals haven't saved. In 2004, the median 401(k) holding was $31,000. This is happening at a time when we'll have more retirees than ever. We have 38 million senior citizens now. By 2030, we'll have 72 million. It's like adding another New York and another Texas of just seniors.
Why did the traditional pension system fail?
Pensions were a feature of a world where there wasn't much global trade, where unions and companies were both protected against outside competition, and where workers stayed at one company for much or all of their working lives. Unions were able to press for too much or, alternatively, managements gave too much. Suddenly, when American firms were competing against foreign firms that hadn't given the same sorts of benefits, there were gross cost disadvantages.
Why are other retirement plans—401(k)'s, private savings—poor replacements for pensions?
Pensions replicate the insurance feature of collective security. Some people retire when the market is high and some retire when it's low, and it doesn't matter to the individual because the money will be there. With 401(k)'s, that security is lost. If I retired in 2000 when the Nasdaq was at 5,000, I'm in good shape. If I retired in 2002 when the Nasdaq was at 1,200, I've totally lost. Then, you can outlive your savings. Since pensions are structured like annuities, you don't have that risk.
Why is government better suited to shoulder some of these issues, like saving and healthcare?
People are [already] switching jobs because of healthcare. I don't think that improves the function of the labor market. What if someone said your employer had to pay for your kids' college education? There's no reason why that's any less silly than having your employer pay for healthcare. There are other options. I think the Hillary Clinton plan of a retirement 401(k) the government would match is a good one. [Barack] Obama has a very good twist on that. He would say to employers that everyone has to have a 401(k) plan, and the default option would be workers enrolled automatically who would have to opt out later. Any solution that gets society saving more is a good one.
Reader Comments
America's Retirement System
The Defined Benefit Pension system can not be sustained in a world of constant change and globalization.
However a portable 401(k) plan starting at an early age like social security taxes could. Had I had a matching 401(k) with portability starting at age 16 like my first payments into Social Security, there would be a reasonable chance for a retirement with sufficient income. One could convert the 401(k) into annuity like payments.
A major mistake from a tax standpoint was the elimination of fhe deductability of the first $2000 of IRA contributions from ordinary income in 1984.
Everyone understood the benefit of deducting $2000 from ordinary income and tax free growth.
The Madness of Government Pensions
Journalist Lowenstein wants all of America's pension plans to operate like the biggest Ponzi scheme of them all -- social security. Promise today lifelong guaranteed benefits that don't have to be actually funded until years later.
Reality check: Almost EVERY such government defined benefit plan in America -- indeed the world -- is underfunded. Usually badly underfunded.
It's the fatal flaw of all such plans. Politicians get reelected by legislating huge public employee pensions for which they don't have to provide adequate funding -- funding that future politicians will have to deal with. Few elected officials can resist that temptation.
We are trillions of dollars in debt for public and (taxpayer guaranteed) private defined benefit retirement plans that simply don't have adequate funding to deliver on the promises. Since the Tooth Fairy has retired, the burden falls entirely on taxpayers to make up the shortfall.
And we're not talking chump change here. Every city, county, special district, state and federal pension plan will require taxpayer bailouts. And that assumes the stock market grows at a robust rate forever.
The federal government can meet their obligations if they suspend COL increases and devalue their pension payouts through hyper-inflation. Fortunately our state and local governments have no such option. But, of course, such inflation is a tax on us all, with disastrous consequences.
Already massive fiscal meltdown is all but guaranteed. And yet Lowenstein wants to expand such folly to provide such underfunded pension benefits to all Americans. Sheer madness.
myth of Social Security problems
Of course everyone knows that despite the hype, Social Security is perfectly solvent and well for many many decades. Worst cases forecast deficits 50 years from now, not insolvency, deficits, that can easily be fixed by minor adjustments, if they materialize.
The real secret is that people want to simply rob Social Security by ruining its reputation and then changing the program by threatening to dishonor the debt.
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America's retirement system
What a ridiculously flawed piece of journalism based upon a set of implied biases. The pension "system" hasn't failed. First, what exactly is the pension "system?" There are a number of different retirement programs available for people, which could provide a pension upon retirement. Some of them are employer sponsored: 401(k), Roth 401(k), 403(b), 457, 401(a), non-qualified defined contribution plans and traditional defined benefit. There are also a number of retirement vehicles available to individuals outside of the employer: IRAs, Roth IRAs, retail brokerage accounts, bank saving vehicles. Third, there is U.S. sponsored social security. Does the interviwer mean the system as in all of the above savings vehicles? If so, what exactly of all of the above is "failed?" All of the above represent a wonderfully diverse set of savings vehicles to provide a comfortable retirement.
May 01, 2008 14:11:21 PM [permalink] [report comment]