American workers are facing a pension crisis, but it’s not the one described by the mainstream press or opponents of traditional pension plans. The real crisis is that many workers face a bleak old age because either they have no pension to supplement Social Security or they have only a defined contribution savings plan like a 401(k) account that will run dry before they die.
New York City Comptroller John Liu recently called attention to this problem saying that the decline of retirement security will cause many low- and middle-income workers to live their old age in poverty. He also said that increased poverty among the elderly will put an enormous strain on government resources.
To deal with this crisis, Liu proposed making a traditional defined benefit pension plan available to workers whose employers don’t offer such a plan. Liu’s proposal would allow workers to contribute to a Personal Retirement Account managed by professionals working for the city’s public pension fund. Upon retirement participants would receive a guaranteed annuity for the remainder of their life.
Employers could also participate in the plan by contributing to the their workers’ accounts. The cost for doing so would be lower than the cost of a defined contribution plan.
Liu’s proposal is based on a plan proposed by Teresa Ghilarducci in her 2008 book entitled When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them. Ghilarducci, the director of the Schwartz Center for Economic Policy Analysis at New York’s New School, argues that the decline of traditional employer-based pensions has made it much more unlikely that low- and middle-income workers will have a secure retirement after a lifetime of hard work.
A report from Liu’s office entitled Are New Yorkers Ready for Retirement confirms Ghilarducci’s assessment. According to the report, over the last decade, the percentage of workers in New York City with access to an employer-based pension has declined from 48 percent to 40 percent, leaving many more workers with no supplement to Social Security. Furthermore, 35 percent of New York City households whose head is facing retirement have liquid assets of less than $10,000.
The effect of retirement insecurity in New York is already starting to manifest itself. According to Liu, the number of elderly people living in the city’s homeless shelters is up 55 percent during the last decade with half the increase taking place in the last two years.
As more elderly people slip into poverty, they will put a greater strain on the city’s social services. The cost to the state and federal government will also increase because they will have to spend more on Medicaid, food stamps, and other similar services.
According to Ghilarducci, much of the reason for the looming retirement insecurity crisis “is that defined contribution plans have replaced employer pension plans,” Ghilarducci writes. “And these new forms of retirement accounts . . . will not fill the gaps created by the loss of employer pensions.”
Ghilarducci says that the problem with defined contribution plans is that they charge high administration fees, workers in the plans have little background or training to help them invest wisely in a wildly fluctuating market, and many take money out of the accounts to pay for emergencies such as the loss of a job or unexpected medical expenses.
Another problem is that defined contribution plans were only intended as a supplement to rather than a replacement for traditional pensions and do not guarantee an income until death after retirement. As a result, many defined contribution plan participants outlive their benefits.
Defined contribution, according to Ghilarducci are best suited to high-income people, who can profit from the plan’s tax advantages.
Without true pension reform like the one Liu is proposing writes Ghilarducci, “only the privileged few will retire voluntarily.” The rest of us will work until we die or until we’re enfeebled and forced to retire.