Retirement Portability and Pension Reform in the United States

Introduction: The Retirement Income Crisis

It seems almost ludicrous to discuss retirement portability in the current climate, with the chief executive of the United States attempting to force retirees into a position they had not suffered since before the Great Depression. At the tail end of that era, Social Security was established "to protect the elderly from indigence late in life — to prevent a 'poverty-ridden old age,' in the words of Franklin D. Roosevelt" (Peterson, 1996). In fact, many people still view it as essential legislation, and arguably legislation that symbolizes the humanitarian nature of the United States. In a pre-buttal to George W. Bush's 2005 State of the Union address, House Democratic Leader Nancy Pelosi said, "Social Security is the most visionary example of what President Franklin Roosevelt called 'bold, persistent experimentation.' Its goal was to ensure that the prospect of retirement was not met with the specter of poverty" (Pelosi, 2005).

Since its inception, however, Social Security has increasingly come to provide benefits for far more Americans than originally intended. But it also pays benefits to middle-class and affluent Americans "many of whom can live well enough without these benefits" (Peterson, 1996); this is becoming a bone of contention that has an impact on private pensions and pension portability. Both, the critics contend, pander to those who don't need the help.

If Social Security benefits were to be slashed, as was then under discussion by the Bush Administration, it would deprive many Americans of the chance to plan for their retirement future. "Among Social Security recipients whose incomes are under $20,000, Social Security accounts for more than half of the total" (Peterson, 1996). Moreover, it would force millions of others into a demographic depression, eliminating the safety net originally constructed to protect lower-income elderly Americans from devastation and, literally, the poorhouse (Peterson, 1996). For this constituency, retirement portability is not the primary issue; the ability to retire at all is far more pressing.

The problem of retirement income is serious indeed. The first wave of Baby Boomers began to retire around 2008; at that time, they stopped paying into Social Security. Because Social Security is a pay-as-you-go plan — meaning current workers fund current retirees — the ratio of payers to recipients was projected to drop from 3.3 to 1 down to 2 to 1 by 2030. Even by 2018, Social Security was not expected to collect enough to cover annual benefits. "By 2042, money pledged to the program's trust funds will run out completely, according to a Social Security trustee report published in March" (Rafter, 2004).

Logically, then, private pension plans and funds would have to take up the slack — and that was one of the messages in President Bush's push to privatize retirement income funding. However, "A record 35 million Americans and their families are covered by defined-benefit pensions … (and) … despite stock prices that have rebounded from 2000 lows, many plans remain underfunded" (Rafter, 2004). Portability of nothing is still nothing; any discussion of the portability of retirement plans is necessarily limited in scope to a relatively wealthy segment of the population.

Americans who do have private pension plans through their employers are finding those benefits slipping away. In August 2004, United Airlines announced that it would probably end its pension plan as part of a bankruptcy restructuring; that, in turn, put pressure on the Pension Benefit Guaranty Corp., "the government agency that insures pensions for 44 million U.S. workers" (Rafter, 2004). It is notable that the number of Americans whose pensions are guaranteed is approximately the same as the number who lack health insurance — and it is highly unlikely those without health insurance make up any significant part of the pool of Americans with threatened pensions.

Corporate America has preceded the President in pushing the burden of pension risk onto workers. The advent of the 401(k) was doubtless helpful in accomplishing that goal. Companies are now more often offering "more portable defined-contribution plans" than the defined-benefit plans that are much more difficult to translate across various corporate structures. As Rafter (2004) notes, "Some (companies) are dropping pensions altogether." That is not surprising, and might be considered another aspect of ERISA (Employee Retirement Income Security Act), which was known informally as the Lawyers' and Accountants' Full Employment Act, so difficult was it to administer when it first appeared.

Today there are more than 70 million Americans who don't have to worry about these things because they don't have access to any sort of "tax-subsidized payroll-deduction saving plan, and therefore tend to save very little for retirement. As a result, fewer than 60 percent of today's workers aged forty-seven to sixty-four are likely to receive benefits equal to even half their pre-retirement income when they stop working" (Geisel, 2004).

In 1996, Peterson noted that private-sector pension coverage had been flat since the early 1970s, about the time the 401(k) was being born. He thought that it stemmed "from long-term changes in the work force and in the nature of work — part-time work, working at home, multiple careers," a social phenomenon that accelerated after a decade and more of downsizings, offshorings, and layoffs. "As for Americans lucky enough to have pensions, they will be surprised, if not seriously disappointed, by how little their plans have set aside for them: the typical defined-benefit pension plan for average-earning workers with thirty years of service replaces just one third of pre-retirement earnings — an amount that is not indexed for inflation" (Peterson, 1996).

This presents more than one sort of problem. Peterson noted in 1996 that Baby Boomers, especially, were in denial about their retirement income. While almost two-thirds believed they could live where they wanted and live comfortably in retirement, they were terrified that neither they nor their government was saving enough to make it possible. "Some two thirds confess that they've never even calculated how much they need to save for their retirement, and an amazing 86 percent acknowledge that 'future retirees will face a personal financial crisis 20 years from now'" (Peterson, 1996). They know the government has made promises it won't be able to keep, and they also say that individuals should be responsible for their own retirement income — a wish that the Bush Administration was trying to make come true, even if the 401(k) had not been able to make much of an inroad into their retirement savings habits.

Retiring Baby Boomers will need private savings apart from a company pension or Social Security. But market forces will come to bear in this arena. What one household saves in a bank account or mutual fund, another household borrows. "Whenever the stock market or housing prices rise, many households may feel that they're saving enough. But our aggregate personal-savings rate, except for pensions, is now barely positive" (Peterson, 1996). So even those who do have 401(k)s will likely fall short, portability or not.

While 44 million employees enrolled in 401(k)s is a significant number, it is more than counterbalanced by the 70 million who lack them. In fact, it appears that the concept of retirement portability primarily affects the upper class and parts of the middle class; for the working class and the working poor, the idea of retirement portability is as meaningless as portable health insurance is for the roughly 45 million uninsured Americans.

Of course, some low-income workers are able to participate in a 401(k), but the tax incentives are not helpful to them. As Geisel (2004) notes:

Income-tax deductions are worth the most to high-bracket taxpayers, who need little incentive to save, whereas the lowest-paid third of workers, whose tax burden consists primarily of the Social Security payroll tax (and who have no income-tax liability), receive no subsidy at all. Federal tax subsidies for retirement saving exceed $120 billion a year, but two thirds of that money benefits the most affluent 20 percent of Americans.

Despite all that, the 401(k) is called, by some, "the envy of the world" (Calabrese & MacGuineas, 2003). Traditional and 401(k) pension plans have, between them, nearly $7 trillion in assets, and account for the "vast majority of financial assets accumulated by households in recent years" (Calabrese & MacGuineas, 2003). The authors say that the system works well because it offers powerful incentives — tax breaks and employer matching contributions — to encourage individuals to contribute to the plans. Other reasons include the convenience and discipline of automatic payroll deductions, as well as hefty penalties for early withdrawal (Calabrese & MacGuineas, 2003).

This situation presents two very different sociological considerations. First, the high frequency of job change in the United States makes portability of these funds essential. Second, despite their utility, compared to the rest of the globe's government-funded retirement plans, Social Security benefits are very modest, forcing more workers to rely on something in addition to Social Security or risk a devastating old age (Turner, 2003).

In 2002, Johnston wrote that more than 42 million Americans — "one in three with a job" — have a 401(k) to defer part of their income for old age. Moreover:

Survey after survey shows that Americans love their 401(k) plans and, except for the oldest workers, value them more highly than traditional defined-benefit pensions, which pay a lifetime annuity, are largely guaranteed by the federal government, and have been in decline since the 401(k) began two decades ago (Johnston, 2002).

The reasons for this mirror U.S. society, which includes frequent job changes. Traditional pensions pay off only for those who stay with one company for an entire career; those who change jobs and have defined benefit plans find that their benefits are "frozen in the dollars of the year (they) quit, their value eroded by inflation" (Johnston, 2002).

In 1996, many news media commentators were already noting the specter of old-age financial hardship looming for the Baby Boom generation — more than enough time to have addressed the supposed shortfall in Social Security in a more timely manner, and certainly time enough to ensure that retirement portability applied to a plan that might actually do the job for the rising generation of older Americans.

Peterson, writing in the Atlantic Monthly, noted that what concerned him most about the rapid aging of America — with one in every five Americans projected to be over 65 by 2025 — was not that there would be vast cultural and sociological changes to contend with, but that we wouldn't be able to afford it.

Far from advocating a reckless rush to privatize retirement income, Peterson advocates moving to an "endowment ethic" (1996). Endowment, he notes, implies stewardship — the acceptance of responsibility, the factor that "generated America's high savings, high growth, and rising living standards in the past" (Peterson, 1996). Back then, however, all the stewardship was not forced onto one group, the workers. Rather, it was shared by individuals and corporations alike — before the era of the "cash cow," in which corporate managers simply milked companies dry with no thought of stewardship of the company's assets and goodwill, or of the social contract with those who performed its labor.

The Baby Boomers, like their parents, will expect to reap the benefits of a healthy, happy, prosperous old age. But consider this: while the parents of the Baby Boomers were voting increasing benefits for themselves — knowing they had birthed a huge generation to pay the freight — they were simultaneously voting down school bond issues. The result is that the children of the Baby Boom are ill-prepared to pay for their parents' retirement, just as their parents are, even now, paying for their own parents.

The Baby Boomers' babies were few in number as well. One need only cite the statistics for Ph.D.s in the 1970s without jobs but with college loans to pay to understand that phenomenon and its effect both on the Baby Boom's childbearing capacity and on the fact that the early years of that generation's work life were not likely to allow money for socking away into 401(k)s. Especially the younger Baby Boomers, born in 1964, did not even start working until half a decade after the introduction of 401(k)s; at the low-pay end of their careers, they could not take advantage of the plans even when one was offered.

Peterson's commonsense conclusion was that "We cannot sustain the unsustainable. Nor can we finance the unfinanceable" (1996). He predicted that by 2030, when all the Boomers will have reached age 65, annual surpluses in Social Security tax revenues will be negative. The combined cash deficit that year could be as high as $1.7 trillion in 1996 dollars. Clearly, that — combined with the tax cuts of recent years and the cost of sustained military engagement — is not supportable. So, indeed, something must be done.

The problem is that the Bush solution resembles closing one's eyes rather than addressing the alligators in the swamp. While the 401(k) was an attempt to relocate the alligators, it would seem that some of the alligators are too small to be relocated that way, and some swamp draining is also in order. In other words, it seems extremely short-sighted to offer retirement options and portability to people who can't afford basic living expenses, never mind additional mandatory contributions.

Peterson is fixated on the Baby Boomers — a not unreasonable fixation. He is also fixated on fixing Social Security because "Millions of seniors would be destitute without federal benefits," and that will only get worse as the Baby Boomers retire. He argued in 1996 that younger Americans needed to be encouraged to begin saving immediately. A Fortune magazine study found that if a couple at age 40 went to dinner and a movie only twice a month rather than four times, they could add that money to a 401(k) and net "$169,500 for their retirement at sixty-five. Paying off credit-card bills when they come in instead of incurring finance charges will yield another $121,400" (Peterson, 1996).