Of Pensions, and Piggybanks: The Challenges of Ensuring a Secure Retirement

Imagine that every week, decade after decade, you faithfully put aside part of your pay in a special piggy bank to provide for your golden years. But when you are ready to retire, your employer takes all your savings back.

Or imagine that, instead of money, your employer deducts money from your paycheck in exchange for IOUs stamped: “Money to paid upon retirement.” But when you retire, your employer says no money has been put aside for you.

You did nothing wrong, but you will not have a secure retirement.

This is the plight of many employees today. They agreed to defer part of their income for their retirement, but their employers have not kept their side of the bargain. Surely, New Jersey wins the prize for absconding with money owed its public employees. It put so much money on its tab that it now owes $53.9 billion in pension funds But rather than do the right and moral thing, Governor Christie blames the victims. Oddly enough, instead of public outrage over this broken promise, many people are attacking the employees who had – but now have lost – good retirement and health care plans.

Across this country, both private and public sector workers’ retirement income is in peril. Attacking public employees’ benefits will not help private sector employees. Rather, everyone needs to work together to understand what has gone wrong so we can fix the problem and ensure we keep our promises. Here is some basic information about ensuring people can have a secure retirement.

First, having adequate income in retirement depends on some combination of Social Security, defined benefit pensions, defined contribution retirement balances in IRAs or 401(k)s, savings, and equity in one’s house.

Not everyone will have all of these resources. The fewer resources available, the more a person’s retirement is at risk.

Social Security is the bedrock for most American workers. But many public sector employees are not allowed to draw on Social Security or they get only a much reduced payout, even if they have paid enough into Social Security to qualify for benefits. As a result, public employees tend to depend far more on their pensions than private sector employees whose pensions top up their Social Security benefits.

Second, pooling savings among as large a group as possible helps smooth out problems by allowing good years to shore up bad years. The Social Security pool is increased for private sector workers by the many public sector employees who pay in but cannot collect Social Security.

Defined benefit pensions are also strengthened by pooling. In addition, private sector employees’ defined benefit pensions are insured through the Pension Benefit Guaranty Corporation (PBGC), but public employee pensions are not protected by the PBGC. One down side of defined benefit pensions is that they have vesting and years of service rules that tie employees to an employer in order to receive a full pension.

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In recent years, many private sector employers have done away with defined benefit pensions and either replaced them with no retirement plan or 401(k) plans. 401(k) belong to the employee, not a specific employer, so they are portable. But the money is in individual accounts and not pooled. As a result, individual accounts puts money saved for retirement at risk. Sadly, many have recently learned just how vulnerable unpooled retirement accounts are to shifts in financial markets. Many workers, who were part of the ownership society, have seen their 401(k) balances crash, leaving them with insufficient retirement income.

We hear a lot about how well Social Security is funded. Fortunately, any funding problems it has are easy to fix. Right now no Social Security taxes are paid on income over $107,000. This cap lets those who could certainly afford to pay the same percentage of their income into Social Security as those paid minimum wage off the hook. If the cap were removed, Social Security would be solvent forever.

The real retirement funding crisis involves owners of 401(k)s who have not paid in the amounts needed to for their retirements. According to a 2010 EBRI report, almost half of people aged 36 through 62 are at risk of not having enough retirement income to pay for “basic” expenditures and uninsured health care costs. The $6.6 trillion gap in 401(k) funding means that generations of American retirees will be hard put to support themselves in retirement, even if they get Social Security benefits.

People have not paid into their 401(k)s because wages have not kept up with inflation. The millions of workers who have been hard pressed just to pay for the bare necessities – food and shelter – cannot put aside any money for retirement and are unenthusiastic and even resentful about paying the taxes necessary to support the cost of government.

To solve our retirement problem, then, we must understand why have so many Americans slipped into poverty.

The decline in pay tracks the gradual decline in union representation and the loss of union power to demand decent pay and benefits. Union representation has been lost, not because employees wanted to be free to negotiate on their own, but because trade and other policies have sent our best paying jobs overseas. You can see the results in the now blighted, once prosperous towns throughout our country. And you can see the results in the faces of so many people who will not have a secure and dignified retirement.

It diminishes us as a people when we cannot ensure that everyone will have a secure retirement. Only by coming together can we ensure that everyone can retire with enough money to live in dignity.

Here are links to additional information on pensions and public employees.

The CEPR Social Security Benefit Calculator This calculator estimates your family monthly income during retirement and compares it to other households in your county with similar demographics—your race, age, and marital status. Alternatively, you may compare to the state as a whole. In some cases, the available data may be insufficient to obtain a reasonable comparison. In such cases, the comparison will be to the overall county or state average.

N.J. Senate President Sweeney says state must pay into pension system for reform to happen

Unfunded N.J. pension liability grows to $53.9B

National Institute on Retirement Security Policy Conference, Raising the Bar: Policy Solutions for Improving Retirement Security

Kathy Ruffing and Paul N. Van de Water, Social Security Benefits are Modest: Policymakers Have Only Limited Room to Reduce Benefits Without Causing Hardship January 11, 2011

EBRI, A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Gen Xers, Feb. 2011

Income Inequality Grew Across the Country over the past Two Decades: Early Signs Suggest Inequality Now Growing Again After Brief Interruption

Jeffrey H. Keefe, Are New Jersey Public Employees Overpaid?