WE ARE ALL THIRD WAY NOW:

Baby Boomers have been retiring in increasing numbers, and now some are dying. They leave behind a giant pile of money that the media have labeled "the greatest wealth transfer" in modern history: a collective net worth that currently sits at $35 trillion, much of which will be passed down to their heirs. It's so much money that, naturally, the Biden administration is examining ways to tax it, charities and nonprofits are angling for their share of it, and estate lawyers are licking their chops at the prospect of helping to plan how it all gets dispensed.

Yet news stories about this wealth transfer are overlooking something basic: a simple explanation of how boomers accumulated this wealth amid a supposedly massive financial crisis spurred by the alleged inadequacies of our private-sector pension systems, which, four decades ago, began a shift from defined-benefit retirement plans to individual savings accounts. Rather than leaving a generation bereft, as critics have predicted for years, that shift helped place an unprecedented amount of money in the hands of boomers, while laying bare the inadequacy of the defined-benefit systems that persist today in some places--especially in the misguided public sector.

The seeds of the shift were planted in the 1960s, amid several well-publicized failures of private pension systems (including a plan covering some 10,500 workers and retirees at a Studebaker auto plant in Indiana that went bust, leaving enrollees with just cents on the dollar). Spurred by such disasters, Congress created legislation to govern plans and protect employees, including rules on how workers should be vested in these plans and what constituted minimum funding requirements for pensions. The new rules seemed to make sense until it became clear that they had sharply boosted the cost of funding defined-benefit plans, which guarantee workers an income for life based on a formula that considers a worker's years of service and final salary.

Unable to meet those costs at an affordable price and wary of the risks now involved, companies began rapidly shifting toward defined-contribution plans, in which employers set aside a specific amount for each worker in an individual account--a type of plan formalized in a 1978 amendment to U.S. retirement law. The share of workers with defined-benefit-only plans in private industry consequently dropped precipitously, from about 25 percent in the 1970s to about 3 percent today, while the share participating in company-owned, defined-contribution pensions rose from 8 percent in 1980 to 31 percent today. Around the same time, Congress enacted laws to let those who worked for businesses that didn't offer retirement plans save on their own through individual retirement accounts.

Boosted by market returns, assets in these contribution plans have soared. In the last 25 years alone, the combined assets of defined-contribution plans offered by employers and individual retirement accounts (many of which are rollovers from company defined-contribution plans by workers who have changed jobs) have increased nearly eightfold, to $23 trillion--far outpacing the holdings in any other category of retirement plans. Those accounts now amount to nearly two-thirds of all U.S. retirement assets, up from less than 25 percent in 1995. 

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