Real Retirement Security – What Would it Look Like?

Real Retirement Security – What Would it Look Like?

    The massive PPA-2006 did a little to protect the security of one government agency.  But PPA  did almost nothing to protect the retirement security of those who need it the most.  These are the people who are unlikely to accumulate adequate retirement security without employer-sponsored or government-sponsored assistance – the very same middle income employees (Studebaker’s “losers”) who needed it the most 40 years ago just before ERISA’s enactment  (the “target group”).  Studebaker’s “losers” would be adequately protected by the PBGC under today’s law IF, as they did then, they had an adequate DB plan.  But they’d still be living in a dream world if, today, they thought their employer would have a DB plan much longer.

Consider the current status quo:

    DB Plans are freezing or dying or both.

    Without DB Plans, “early retirement” is less and less feasible.

    “Cash balance” hybrid plans?  Perhaps a useful way for an employer to capture an actuarial surplus, but hardly a substitute for the good old fashioned lifetime annuity.  Indeed, hardly even a favorable substitute for a garden variety DC plan or 401(k).

    DC Plans are replacing DB Plans, but hardly anyone thinks that a 401(k) plan by itself will provide retirement security for the middle class.  Why not?  Just “follow the money” – cashout after cashout to pay for tuition, mortgage debt, credit card debt, and so on.

    Employer-sponsored medical benefits?  The tilt away from sufficient full coverage is becoming a landslide,

    Employer-sponsored “lifetime” (vested) retirees’ medical benefits?  Forget it.

    Of course there’s Social Security, but its index is likely to be cut back. 

    And in the meantime, Medicare, or what’s left of it, will itself require greater and greater employee co–payments and premiums to control a seemingly-uncontrollable funding shortfall.  Where do the increased premiums come from?  They’re deducted from Social Security, which makes both of them less and less sufficient.

If there a “fix”?  What would it look like?

    On the pension side: How about “locking-in”?  – No cashouts.  No withdrawals before retirement age.  And all benefits in annuity form.  Objections?  Employees won’t contribute?  But then what’s the message – that employees won’t use 401(k)’s except for short-term savings?  Then why have a tax shelter for that in the first place? – it’s got nothing to do with retirement security.

    On the health benefit side: Well, just keep rearranging the desk chairs on the currently sinking Titanic, but don’t delude yourself into thinking it’s not sinking.  National Health is on the way.  You don’t like it?  Nobody does.  It’s not great.  It’s just inevitable.  (As a current beneficiary of Medicare, I can tell you that my “single payer” system is a lot better than most youngsters’ “managed care” coverage).  I don’t love it.  But I like it a lot better than what I had before age 65.

    On the Social Security side: There’s no free lunch.  It’s the safety net.  We’ll just have to pay for it.  “Third rail” of American politics?  I sure hope so.

    Overall, can retirement security be made more secure (or at least not less secure)?  Sure.  But to do that, politicians will need to persuade themselves and their constituencies that this will not be a painless cure.  It will just be better than the currently-threatened death by an thousand cuts.

Comments

[mike]

i would also add that bringing executive compensation in line would go a long way to encouraging a fix to the whole system. as it stands now executives have no real interest since most of their post employment benefits are not derived from the current system.

[Carl Johnson]

The difficulty with Frank Cumming's analysis is that it's an honest, accurate assessment of the benefit situation. No one's going to like that. The only thing I would add regarding "401(k) plans" is the need to clean up the investment side. I'd like to hear the "fix" Mr. Cummings has for that. Cure it all through participant financial education and advice? Get real. The DOL's default investment regulations? Ditto. This one is tough conceptually as well as politically.