Goodbye pensions

Marketplace Staff Aug 9, 2006


KAI RYSSDAL: On its way out of town last week, the Senate passed a pension reform bill. It covered a lot of ground. The thing came in at almost 1,000 pages and it had a little something for everybody. Bankrupt airlines got some breathing room, and companies with traditional pensions, defined benefit plans they’re called, have to make sure they’re fully funded. The whole thing, in theory anyway, makes Americans more secure heading into their golden years. Commentator Robert Riech says not so.

ROBERT REICH: I’m willing to bet this legislation is the nail in the coffin of defined benefit plans. From here on, companies will follow the lead of Hewlett-Packard and others and terminate the plans altogether. Or go into bankruptcy to get out of a unionized pension contract.

As recently as 25 years ago, more than 80 percent of large and medium-sized companies offered defined-benefit pensions. By 2005, fewer than a third did. What happened? It’s called competition, folks.

In an era of competitive cost-cutting, it’s cheaper to switch to what are called “defined contribution” plans, like 401Ks, where employees decide how much of their paychecks to put away.

The incentive for employees is they don’t have to pay taxes on what they save until they withdraw the money at retirement. But that incentive hasn’t been enough. In recent years, one out of three employees with the option hasn’t taken advantage of it.

The new law lets companies automatically enroll employees in such plans unless the employees specifically choose not to join. That’s a help.

But the law doesn’t require employers to provide any matching funds, not even a dollar for every three socked away by the employee.

Which means, given the same competitive pressures to cut costs that’s been killing off defined-benefit plans, we can expect fewer and fewer employers to contribute anything.

Look, I’m not blaming companies. They have to show profits. And I’m not blaming employees. Many can’t afford to save. Adjusted for inflation, hourly wages today are lower than they were thirty years ago.

I’m blaming Congress for not requiring all companies to do more to offer some sort of a pension plan and contribute something to it.

Seventy-six million baby boomers are heading full-speed toward retirement, but most are not saving. Their employers are not saving for them. And even if Social Security were rock-solid, it’s not nearly big enough to fill the gap.

907 pages of legislation and we’re still, as the President’s father used to say, in deep doo-doo.

RYSSDAL: Robert Reich was Secretary of Labor for President Clinton. Now he’s a professor of public policy at the University of California at Berkeley.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.