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February 01, 2005

The Real Pension Crisis

Social Security will pay full benefits until 2052, according to the Congressional Budget Office. That is no crisis.

But across the United States, existing private pension plans are collapsing and taxpayers are picking up the bill through the Pension Benefits Guaranty Corporation. Those private pension funds are already underfunded to the tune of $450 billion. Now, there are a few reforms proposed for dealing with the potential costs to taxpayers, but very little debate about shoring up the overall private pension system.

A lot of folks think "private accounts" or expanded 401(k)s will do the trick. But in fact, the era of 401(k)s in the last twenty years has seen a decline in the net assets of the average retiree, when you factor in the disappearance of traditional pensions.

Here are the hard numbers. Despite two decades of a bull market on Wall Street:

the net worth of the median older household - the one at the midpoint of the economic ladder...declined by 2.2 percent, or $4,000, during the period, to $199,900.
This is largely due to the decline of the traditional pension, which has been astonishingly steep: where more than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983, by 2001, fewer than half did.

And for those who think cash in a 401(k) is a substitute for steady pension income year after year, read this study from the Employee Benefit Research Institute, which has been tracking what actually happened to retirees' wealth over the last decade in this new era. The results are pretty depressing:

  • about 15 percent of the 64–74-yearold cohort had lost 50 percent or more of their total wealth from 1992–2002
  • about 30 percent had lost 50 percent or more of their financial wealth
  • Catastropic health care costs played a role in these losses, but the bottom-line is that it's hard for individuals to manage the risks of short-term financial management during retirement. Yes, that wealth could be converted into lifetime annuities upon retirement, but if that's the goal, why not just reinforce the private defined-benefit system to begin with?

    Democrats and progressives are fighting valiantly to defend social security, but they are ignoring the crisis in private pensions which is destroying the retirement dreams of many workers. The reality is that the failure of the 401(k) pension system is the best argument for leaving social security alone, so highlighting those problems would not detract from the social security fight but reinforce the message.

    Posted by Nathan at February 1, 2005 06:18 AM