Retirement Plan Shifts Creating Generation of Workers Unable to Retire

As businesses and governments in the developed world struggles to understand why unemployment is proving so hard to reduce, they steadfastly ignore one potential reason whose rise they encouraged: the end of traditional pension plans.

The movement to replace 'defined benefit' plans in which the retiree receives a certain amount began in the 1980s when US and European manufacturers declared that pension plans were a major reason why they were unable to compete with Japanese competitors. That pressure only increased as China emerged as the world's factory, touting its lower costs as a significant advantage.

Companies under contractual and some societal pressure switched their employees to 'defined contribution' plans in which the outcome was far from assured, but the promise of some regular financial assistance along the way was agreed upon. As a result, fewer than 11% of US workers now have what their own parents would have recognized as a traditional pension. And that number is shrinking.

The problem, as the following article explains, is two-fold: companies and the 'financial advisors' they designate are primarily concerned with their own profitability, not with beneficiaries' interests. Plan participants are not given much guidance, if any, and the amounts available at retirement are lower than they would be under a legacy pension plan.

The second implication is that retirees, who are living longer than earlier generations do not have as much money to spend. So the US and European economies, traditionally consumer-driven, do not have that spending stimulus to rely upon, which, in turn, makes it harder for them to keep supporting business growth.

This appears to be yet another unintended consequence of the economy's financialization. A relatively few executives and financial advisory firms have benefited in the short term, but the economy as a whole has suffered. However, the worm does turn: the beneficiaries of this reduction in benefits are now finding that their businesses are suffering as a result, leading to shorter tenures for CEOs who can not find a formula for successful growth and to massive lay-offs in financial services firms that no longer have as much money to invest.

Those who ignore cycles tend to get caught by them. JL

Steve Vernon reports in CBS/Moneywatch:

Large U.S. employers continue to eliminate traditional pension plans that pay retired workers a monthly lifetime pension in favor of defined contribution and hybrid plans that offer lump-sum payments at retirement according to a recent survey HR consulting firm Towers Watson.

Among Fortune 1000 companies, only 11 percent still offer a traditional pension plan to newly hired salaried workers, down from 14 percent in 2011 and continuing a long slide from 90 percent in 1985. Conversely, in 1985 only 10 percent of those companies offered only a defined contribution plan to salaried workers -- today that figure stands at 70 percent.

The primary reason for this trend has been financial: Employers don't want the exposure to unfunded liabilities if capital markets perform poorly. At the same time, until recently employees generally hadn't expressed a preference for traditional pension plans and, in fact, have largely embraced 401(k) and other defined contribution plans.

But this trend has its consequences in the workplace, as large numbers of baby boomers have 401(k) balances that are inadequate to fund a traditional retirement. To make matters worse, most retiring workers don't know how to turn their nest eggs into reliable retirement income. Employers also haven't provided much help by offering retirement income options in their defined contribution plans.

"The ongoing shift from [defined benefit] to [defined contribution] plans due to cost and cost volatility is helping to create a next generation of retirement-age workers who may not be able to afford to retire when they would ideally like to," said Towers Watson consultant Kevin Wagner in a statement.

As a result, older workers are delaying retirement, potentially clogging up promotional opportunities for younger workers and helping keep unemployment levels high for the younger generation. And this next generation is beginning to learn from the unfortunate circumstances of the current generation of retirement age workers.

"Interestingly, as this shift in retirement plans continues, other Towers Watson research shows that younger workers are finding DB and hybrid plans more appealing than DC plans," said Alan Glickstein, another retirement consultant at Towers Watson.

The bottom line is that workers of all ages need to start expressing preferences for retirement plans that will enable some level of financial security in their retirement years. Such options include sponsoring traditional pension plans; sponsoring hybrid plans that offer the potential for lifetime retirement income; adequately funding DC plans; and providing retirement income options in DC plans. And there are good business reasons for employers to step up to the plate to help insure the retirement security of their workers.