It’s not just the government which has found itself in unpayable amounts of debt. The people of the U.S. have been following suit. Looking around the world we see that most people encountering the same mess. Even cultures who typically don’t use debt and mortgages, have expanded into these ways in recent years. There’s no turning back.
Why are pensions disappearing?
Wiatrowski points to risk. Private companies want to take on less risk when helping to provide for their employees' retirement. It's why these companies are ever more frequently turning to defined contribution plans — such as 401(k) plans — in which employees typically fund most of their own retirement by automatically setting aside money from each paycheck.
This differs from traditional defined benefit pension plans, in which employers promise to provide their workers a specific monthly payout once they retire.
In a defined benefit pension plan, the risk of retirement funding falls on employers, Wiatrowski says. Employers must provide the benefits they've promised employees no matter if the company is struggling or if it's made poor investments.
This isn't the case with defined contribution plans.
"In defined contribution plans, the risk falls to the employees," Wiatrowski says. "The employer might match some or all of their employees' savings, but they still know that each month or once a year they'll have to put in 'X' amount of dollars. Their commitment is a fixed amount. The employees take on the risk when it comes to the investments that they are putting their retirement savings in. Those investments can do well or they can do poorly. But the risk is no longer on companies."
Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the Wharton School at the University of Pennsylvania in Philadelphia, says that defined benefit pension plans were often offered by companies in the so-called rust belt industries, such as steel, auto manufacturing, airlines and railroads. Many of these industries are struggling today, and because of that can no longer afford to offer defined benefit pension plans, Mitchell says.
At the same time, companies that provide defined benefit plans must also pay into the Pension Benefit Guaranty Corp., a government-run insurance program that protects the retirement incomes of retirees relying on traditional pensions. The costs for this insurance are steadily rising, making defined benefit plans more expensive for private companies, Mitchell says.
"It's a little like a death spiral," Mitchell says. "Those insurance premiums are going up because so many defined benefit plans suffer bankruptcies and inadequate funding to back up their promises. The more companies offering these plans that go bust, the higher the Pension Benefit Guaranty Corporation has to raise its premiums and the more employers that are forced to stop offering these plans."
Laura Bos, manager of financial security at the Washington, D.C. headquarters of AARP, says that defined contribution plans were originally launched to serve as a supplement to defined benefit plans.
"Now many workers see defined contribution plans as their only way to save for retirement in the workplace," Bos says.
Bos says that those employees who rely on defined contribution plans need to take an active role in their retirement savings. This means regularly studying the investment mix in their 401(k) plans and making sure that they set aside a high enough percentage of their earnings with each paycheck. Bos suggests that employees save at least 10 percent to 20 percent of their earnings when relying on a 401(k) plan.
What really happens when pensions disappear
Via : Kelley Holland
Plans such as 401(k)s and their ilk have been part of the retirement landscape for decades, and discussions of their pros and cons relative to traditional pensions go back even further.
Now researchers have gone from the theoretical to the concrete and examined exactly how employees respond when their traditional pension plan is replaced. It's not pretty.
The new plan they examined, for employees of the state of Utah, was less generous than the pension plan it replaced, but few employees took steps to supplement their retirement savings. Affected employees also began leaving their jobs at a faster rate.
"It is important not to neglect the effects of retirement plan restructuring on other public employee behavior. Indeed, such outcomes could undermine state governments' ability to deliver services promised to their citizens," the researchers concluded.
"If a state or any other organization is thinking about reducing their benefits, they should consider the impact on worker behavior," said Robert Clark, a professor at North Carolina State University's Poole College of Management and an author of the study. "Workers' behavior might have adverse effects on the organization. Worker turnover could do that. Workers' being less prepared for retirement could do that."
The new plan allowed employees to choose between a defined contribution plan and a hybrid plan that had both defined contribution and defined benefit elements. Employees who did not choose one of the plans were automatically enrolled in the hybrid plan after a year.
About 60 percent of the people hired after the pension reform took effect defaulted into the hybrid plan, the researchers found. Among the employees who made an active choice, slightly more than half opted for the hybrid plan.
The post-reform plan choices were less generous than the old retirement savings plan, so employees could well have chosen to supplement their plan savings at a greater rate—but researchers found that did not happen. Contributions to supplemental retirement savings accounts fell during the financial crisis so that just 25 percent of new hires were contributing between 2009 and 2011; after the retirement plan change, that rate dropped further to less than 20 percent.
Employees who actively chose a retirement plan option contributed more than 20 percent, on average, but those who defaulted in contributed significantly less.
"Maybe if you are defaulting in one area, that is explaining your behavior in other areas," said Olivia Mitchell, a professor at Wharton and a co-author of the study. Defaulters, she said, "end up on the path of least resistance."
The changes to the Utah plan also left employees with less of an incentive to stick with their jobs. Employee turnover had been running at 13 percent before the change; afterward it increased to 17 percent, the researchers found. That may have been partly attributable to an improving economy, but either way, their employer, the state of Utah, was left needing to fill more job openings.
"When considering fundamental changes in a pension plan, as every state government is doing now, they should consider how workers will respond to that and the impact on the quality and quantity of the public sector labor force," said Clark.
Some employers are taking different tacks. Tiered retirement savings offerings, which offer options with varying degrees of complexity, are one example. These options may range from a very basic plan focused on target-date funds to more elaborate ones allowing investments in stock and bond funds or even in individual securities. The University of Pennsylvania recently adopted such a tiered plan, Mitchell said.
That approach works especially well for "a heterogeneous workforce," she said, because it aims to avoid overwhelming people who want a simple plan, but give choices to those who want them.
"If you have a one-size plan, it's going to be easier to explain, and perhaps less expensive," she said. "On the other hand, people have different needs and different risk preferences."
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