October 17, 2015


The Twenty-First Century Retirement Model is Coming Into Focus : The American people are still caught in the transition between two different retirement systems. That needs to change, and it will. (WALTER RUSSELL MEAD, 10/17/15, American Interest)

Defined benefit pension systems have rules that strongly favor long term workers. Workers often didn't qualify for pensions until they worked a threshold number of years--if you left the company before you 'vested', you lost your pension benefits. And because length of service played a large role in calculating pension benefits, workers who changed jobs or careers often ended up with very small pensions. There have been heartrending cases of workers in manufacturing companies who lost everything when their jobs went abroad before they had worked enough years to collect a good pension. And in their 40s and 50s, many could not replace those jobs or the lost pension benefits.

Another consequence of the transition to a post-blue economy: a defined benefit pensions is less reliable.  The pension plan is only as solid as the company that guarantees it. That might have been tolerable 50 years ago, when the American economy was more stable and less dynamic than it is now. But these days, companies can and do go bankrupt regularly. There aren't many floppy disk manufacturers around and the phonograph needle manufacturing industry went belly up years ago. Even new economy companies like Netflix could see their business models swiftly upended by technological change. Accelerating technological change and increased global competition not only mean more job shifting; they mean that more companies go out of business--and that means more insecurity for people who are depending on a single employer to guarantee their life pensions.
So for reasons that have nothing to do with evil corporate greed, there is a strong case for moving from an employer centered pension system that favors life time employment to a worker centered, portable model.

That is what 401(k) plans are all about. Workers make contributions into tax deferred accounts; companies match those contributions depending on their policies, and over a career the pension follows the worker. This is good news: You can accumulate retirement savings all through your career, no matter how many different employers you have. You don't lose if you change jobs, and you don't lose out if your employer goes broke.

Ultimately, the new economy makes a new, worker-based pension system necessary. However, the shift isn't happening smoothly and there are several problems. Some have to do with the transition from the old system to something new, some with the difficulties of setting up an appropriate regulatory and management system for something as complex and important as a retirement system on which tens of millions of elderly Americans of very different economic circumstances will depend. Finally, there is the problem of resistance: the opposition of interests who want to preserve the blue model system for various reasons.

The biggest problem for the transition has been under-saving. People whose parents relied on defined benefit systems haven't grown up with the expectation that you need to make large, regular contributions into your retirement plan starting with your earliest years in the workforce. In many cases, younger workers and workers without a lot of spare cash failed to salt enough money away. As a result, we have a transitional generation whose retirement savings are way short of what they will likely need. That's likely to be a big policy headache as the post-defined benefit generations hit old age.

As this Journal article shows, companies are beginning to respond.

Posted by at October 17, 2015 2:33 PM

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