Tag Archives: Pension Rights Center

Live Poor or Die: The New American Retirement

The very idea of retiring in America had become a mirage–tantalizing, but always sliding into the distance. Those visions of golden years spent playing golf in Tucson or bridge in Boca Raton, promoted by AARP magazine and purveyors of retirement investments, are now nothing more than a chimera for most Americans. The exception, of course, is a wealthy minority, who for the past decade has been squirreling away money they should have been paying in taxes. For everyone else, old age been reduced to three alternatives: Those of us lucky enough to have jobs can keep working indefinitely; the rest can live poor or die.

Anyone who doubts this blunt truth should take a look at a few few recent trends. Start with something called the Retirement Income Deficit. Retirement USA, a consortium of non-profits and unions, which came up with the term,  describes the deficit as follows:

Retirement USA asked the respected non-partisan Center for Retirement Research at Boston College to calculate the figure that represents our current retirement income deficit – that is, the gap between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living.   Using the data from the Federal Reserve Board’s Survey of Consumer Finances, the Retirement Research Center has calculated that figure at $6.6 trillion.The deficit figure covers households in their peak earning and saving years—those in the 32-64 age range—excluding younger workers who are just beginning to save for retirement as well as most retirees.  It takes into account all major sources of retirement income and assets:  Social Security, traditional pension plans, 401(k)-style plans, and other forms of saving, and housing. 

The measure assumes people will continue to work, save, and accumulate additional pension and Social Security benefits until they retire at age 65, later than most people currently retire.  It also assumes that retirees will spend down all their wealth in retirement, including home equity.  The deficit is thus in many respects a conservative number.

This gap is due, in large part, to the demise of the old-fashoned, fixed-income pension system. According to the Pension Rights Center, total employment in the nation today stands at 130 million, of which 108 million people are employed by private business and 22 million public. The traditional fixed-benefit  plans now cover only about 20 percent of the private workforce, and 79 percent of public workers. Half the entire private workforce today has no retirement system at all. And those with 401ks are at the mercy of the mutual fund companies, with their futures staked on the stock market. In the recession, those plans took a dive, losing one quarter to one third their assets.

Even public employees lack the retirement security they once had. There are recent reports that states, because of their own budget deficits, can’t pay retirement monies to their pubic services workers. The news is hyped by politicians and way overstated, said Keith Brainard of the Public Fund Survey, an outfit sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement. Still, pension plans that cover public service workers and teachers in New Jersey, Illinois, and the city of Philadelphia may be at risk, according to Brainard. About 70 percent of state employees are covered by Social Security, but a good 30 percent would be left out in the cold if the plans went down.

But that’s not the end of it. The big financial institutions that run the 401k plans have been busy applauding the comeback of the stock market, suggesting that it redeems the whole 401k concept. Unfortunately, as the recession wears on, a whole lot of people are withdrawing money from their 401ks, instead of (or in addition to) contributing to them. Fidelity Investments included the following in a recent report on developments in the second quarter of 2010:

While the majority of 401(k) participants continued to save during the quarter, the percentage of participants either initiating a loan or a hardship withdrawal increased.  Loans initiated over the past 12 months grew to 11% of total active participants from about 9% one year prior.  The portion of participants with loans outstanding also increased two full percentage points in the second quarter to 22%.  The average initial loan amount as of the end of the second quarter was $8,650 with an average loan duration of three and half years….

During the second quarter of this year, 62,000 participants initiated a hardship withdrawal, as compared to 45,000 participants who initiated one during the prior quarter.  As of the second quarter, 2.2% of Fidelity’s active participants took a hardship withdrawal, up from 2.0% one year prior.  Additionally, 45% of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12 month period ending in the second quarter of this year.  Plan sponsors report that the top reasons why participants are taking hardship withdrawals are to prevent foreclosure or eviction, pay for college, and the purchase of a primary residence.

Fidelity has found that the average age of those taking a loan or hardship withdrawal is between 35 and 55 years old – a worker’s peak earning years – when individuals often have to deal with multiple, competing, financial challenges.  Distributions from a 401(k) or 403(b) are taxed as ordinary income, plus if you are under age 59½ you may be subject to a 10% early withdrawal penalty.

I don’t know much about the pitfalls of 401k loans, so I called up Rebecca Davis, Legislative Counsel at the Pension Rights Center. She explained that if you have a 401K worth $100,000, you can borrow up to half that amount. Before getting the money you need to work out a repayment plan that includes an interest payment to yourself. And that’s where the hitches begin.

To start with, the 401k plan may well charge you a fee for all this; that fee varies from plan to plan. Moreover, when you take the loan from your own plan you must immediately pay the government a flat 10 percent tax—because the money you have withdrawn becomes taxable income. Finally, if you quit your job or get laid off, the loan to yourself from your own plan becomes due immediately–just at the moment when you probably won’t be able to pay it back. And if you don’t pay it back, you’re subject to early withdrawal penalties.

Then comes this important bit of information: The money in your 401k is normally protected from creditors. If you go bankrupt, for example, the creditors can’t get at the money. But once the money is removed from the protective cover of a 401k, pension, or IRA, then it can be seized. So now you’re broke and jobless, and you have to use your retirement funds to pay your debts.  In other words, you are screwed from every possible direction. And if you think things are bad now, just wait until you get old.

Did I mention that Republicans and Democrats alike now want to cut Social Security? Probably not for today’s geezers, but for the old folks of the future–in other words, for precisely the same people who stand to have disappearing pensions and depleted 401ks.  

Ripping Off Workers’ Pay to Increase Executive Pensions

You just can’t win. Here’s news from the always helpful Pension Rights Center on how executives deliberately structure pension plans in in a way that shortchanges rank-and-file workers, so that high riding executives get more money. In other words: stealing from the poor to give (even more) to the rich.

Certain rules in the Internal Revenue Code are designed to prevent employers from discriminating against non-highly paid employees in their pension plans. Unfortunately for the retirement security of their employees, some employers look for ways to get around the nondiscrimination rules.

Instead of sponsoring pension plans that treat all participants equally, some employers circumvent the rules by creating “carve-out” pension plans. These plans often provide rich benefits for senior, well paid employees-often the company’s owners and officers-while covering only a relatively small percentage (or in some cases none) of the non-highly paid employees. While these plans may comply technically with the tax rules as they are now interpreted they are fundamentally unfair. 

Case in point: An article in Physicians News Digest promotes the use of carve-out plans, noting that they allow doctors to “focus the majority of an employer’s contribution to a select group of employees, usually key or highly compensated employees.” In other words, a medical practice can save big bucks by providing one plan for its doctors, while offering many of its lower-paid employees a different, less valuable plan:

By including the key or highly-compensated employees in a defined benefit plan and the remaining employees in a more affordable 401(k) plan, you can keep your retirement plan in compliance with non-discrimination regulations, while keeping expenses at a minimum.

We have discussed the merits of a traditional pension over a 401(k) plan several times in the past. The truly insidious aspect of carve-outs is the fact that the higher-paid employees – the ones who are more likely to be able to save for retirement on their own – are given the better plan, while the lower-paid workers – the ones who can least afford to save for retirement – are stuck with an inferior one. 

Have these employers forgotten that the success of their business is not just a one-(wo)man show?  Or do they just not care?

Moreover, the IRS could probably limit somewhat the discriminatory impact of these plans by issuing new regulations on the technical rules that employers exploit to make carve-outs possible. 

The Ugly Truth About the 401(k)

Back in the spring, Mother Jones published an issue with cover line was “Who Ran Away With Your 401(k)?” and a series of articles about America’s broken retirement system (including one by me).  This week Time magazine has a cover story by Stephen Gandel that’s well worth reading, even though by now it’s stating the painfully obvious: It’s called “Why It’s Time to Retire the 401(k)”:

The ugly truth…is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that’s little help for those who retired — or were forced to — during the recession. In a system in which one year’s gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

 In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That’s because in your early years, your 401(k)’s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market-exposed it becomes. It’s a twist that breaks the most basic rule of financial planning.

And don’t think that the problem is solved by the stock market’s partial rebound, or pronouncements that the recession is over. As the Economic Policy Institute has pointed out, the retirement crisis preceded the recession, and will endure long after it’s over:

Only half of full-time workers have a retirement plan through their employer, and coverage is much lower for part-time workers. Participating in a plan doesn’t mean a worker is adequately preparing for retirement. The median 401(k) account balance was only $25,000 in 2006-$40,000 for workers approaching retirement age. In other words, half of those who had a 401(k) were nearing retirement with less than $40,000 in their account.

Even before the stock market slide, the average person with a 401(k) was on track to retire with only 20-40% of what they need to maintain their standard of living.

The Economic Policy Institute, Pension Rights Center, and others are part of a new initiative called Retirement USA, which says it “is working for a universal, secure, and adequate retirement system to supplement Social Security for those workers who are not in plans that provide equally secure and adequate benefits.” Based on the current effort to achieve universal health insurance, it’s clear they have a long road ahead of them. (Death panels, anyone?)

Supreme Court Upholds the Pension Gender Gap

At a time when most old people have taken a hit to their retirement income, far more older women than older men are living on the edge of survival. A case before the Supreme Court would have helped a few women to slightly narrow the substantial gap between women and men’s retirement earnings. But the Court, in a  7-2 vote on Monday, decided to let the disparity stand.

Until 1978, it was legal for employers to discriminate on the  basis of preganancy. So women who took pregnancy leaves were in some cases given less credit toward their pensions than people who took leaves for other medical conditions. In the case before the Supreme Court, a group of women who formerly worked for AT&T were suing to have  maternity leaves taken before passage of the 1978 Pregnancy Discrimination Act (PDA) calculated fully into retirement benefits. While a lower court ruled in their favor, the majority on the Supreme Court decided that the law was not meant to be applied retroactively.

But since the pensions in question are being calculated now, long after passage of the PDA, dissenting Justices Ginsberg and Breyer argued that the discrimination is, effectively, taking place now as well. Ginsberg wrote in her dissent that “attitudes about pregnancy and childbirth …have sustained pervasive, often law-sanctioned, restrictions on a woman’s place among paid workers and active citizens.” The women workers, she said:

will receive, for the rest of their lives, lower pension benefits than colleagues who worked for AT&T no longer than they did. They will experience this discrimination not simply because of the adverse action to which they were subjected pre-PDA. Rather they are harmed today because AT&T has refused fully to heed the PDA’s core command [that discrimination based on pregnancy must end].

The decision ends any chance to remedy just a small part of the equation that leaves older women much poorer than older men in the United States. As the  Pension Rights Center’s Women’s Pension Project points out:

Because they generally live longer, earn less, and spend less time in the workforce than men, women are particularly vulnerable to unfair pension policies. Without income from pensions to supplement Social Security, women are much more likely than men to retire into poverty. According to the Congressional Research Service, older women living alone are among the poorest demographic groups in the nation.

The fact that women earn less than men (still 78 cents on the dollar) is one reason why their pensions, 401(k)s, and Social Security benefits are lower; another is the fact that they tend to work fewer years total, which results in large part from taking maternity leave and other kinds of family leave. All this adds up to a big difference in later years: According to the Women’s Pension Project, in 2007, the median annual income for among those 65 and older was $13, 877 for women, and $24,142 for men. Some 12 percent of women age 65 and over lived in poverty, compared with 6.6 percent of men. As the Women’s Institute for a Secure Retirement (WISER) points out, that figure rises to almost 20 percent for older single women, and 40 percent for older single African American and Latino women. And all of these numbers pre-date the financial meltdown.