U.S. Workforce Dealt Another Blow
Here we have another bad side effect of how the restructuring of the retirement system in the U.S. has ended in seriously harming working Americans.
Back when funded retirements were replaced by the 401K retirment plan it was hailed as the greatest thing since sliced bread. That has proven false and here we have further proof of the erosion of middle class Americans ability to exercise even minimal control on their own well being.
http://www.msnbc.msn.com/id/31488492/ns/business-personal_finance/
As indicated by this action I am inclined to expect that there will be continuous contribution adjustments made by companies that are in some way connected to profits. This will lead to an unpredicatble and unreliable ability to save for retirement. It will compromise any assurance of a secure retirement. The other thing it will do is force people to work longer and likely face declining wages in later years because of being coerced into having to compete with entry level workers. All while facing an ever increasing cost of living.
So far congress hasn't done one thing to address all the hundreds of billions (trillions?) of 401K dollars lost by working Americans. This will just make the problem even worse.
It should be noted that this is consistent with everything else happening such as credit card rates going up, gas going up in spite of weak demand and all the othe telltale indicators of a major rip off underway.
It occurs to me that workers who belong to a union and have a contract that specifies the conditions of 401K contributions may not be affected by this.
In particular this applies to public sector employees who so far have managed to retain the majority of their benefits. Which, BTW, are very generous relative to private sector employment. Which is also consistent with how congress never fails to take care of themselves. The one exception to this is how poorly this country has treated veterans. Inside of government the one group who has made the greatest sacrifice is treated the worst.
June 22, 2009 5:02 PM | Reply | Permalink
Matching contributions should be viewed as a gift, not as a right.
I think you're implying that we'd be better off if we had stayed with defined benefit plans versus defined contribution.
If my interpretation is correct, I would respectfully disagree. At least with the defined contribution plan, you know for sure that it's "your money". With a traditional pension plan, we have seen too many recent cases where a company in financial difficulties decides it must make changes to its promised benefits, whether through an in-court or out-of-court restructuring.
Why would you choose a pension plan over a 401(k) when the employer can pull a bait-and-switch and decide to cut your benefits?
I'm also at a loss for what Congress could do about people's losses in their 401(k) plan. Investors lost money because the market went down, not because of fraud. So I don't see what would be a reasonable solution - we certainly can't bail people out because they lost money in the stock or bond markets.
Hopefully most people close to retirement age listened to their plan advisors and were smart about asset allocation. Someone close to retirement would have had most of their assets in cash or short-term bonds, which would have cushioned alot of the recent downward slide in asset prices.
June 22, 2009 9:03 PM | Reply | Permalink
Where government creates a system only to have it fail the goal, is a big problem. Having a savings plan where the dollars have been cut by half or more and is barely more than the amount of employee contributions after four decades of saving is a very bad result. I was alive and in the workforce when congress created the 401K system and I have an explicit recollection of congress promising a very different outcome than the one we now face. I count this, as do many other citizens, among the many serious failures of our government.
Working class persons of modest income can't be subjected to the level of risk we have. The projected outcome and the actual outcome are as different as night and day. Had this worked out everything would have been fine. The tens of millions who planned and saved now face an unexpected retirement shortfall for which there is no remedy.
June 23, 2009 5:05 AM | Reply | Permalink
How do you compute the "barely more than the amount of employee contributions after four decades"? Over the last 40 years, the S&P 500 has grown roughly 9-10% per year.
I'm not saying that the 401(k) is perfect, but it has some significant advantages over the defined benefit plan that I highlighted above. Yes, pensions are guaranteed by the PBGC but there are limits to the PBGC that put a portion of a persion's pension at risk. And the PBGC is having its own financial difficulties right now (ie it liabilities exceed its assets). So pensions are having hard times right now too but you seemed to omit mentioning that.
If Congress "promised" anything, then those Congresspeople should be sent to jail. We all know that both pensions and 401(k) balances shouldn't be promised, they both rely on how those assets are invested in the capital markets. Companies need to generate profits, make pension contributions and successfully invest pension assets, otherwise employees are in for a rude awakening.
If we hadn't had a 401(k) plan and stuck with pensions, then most people's pensions would be down dramatically over the past year or so as well. The pension dollars would be invested in a lot of the same assets that 401(k)'s were invested in - stocks, bonds, real estate, commodities, etc. We know that alot of companies have skimped on their pension plans over the years and many companies' plans are significantly underfunded.
The beauty of the 401(k) is that the working class persons you cite have options and decisions that are in their control. I think most people who are or were getting close to retirement would have pulled a big chunk of their money out of the stock market and shifted to more conservative investments. And for someone who still has a good number of years left to go before retirement, hopefully the markets will recover and their assets will grow. We've seen this happen before.
I feel like you're picking one horrific year in the stock market (2008) and saying that because returns were roughly down 40%, that now the 401(k) is a failure. Well, if you looked at pension data from large corporations, you'd see the same types of drops in 2008 but I don't think you're calling pension plans failures.
June 23, 2009 6:25 AM | Reply | Permalink