In a quaint phrase, the Social Security Agency has long described the current retirement system in America as a three-legged stool. One pictures Grandma sitting on that stool, perhaps next to the coal stove, working on some mending. The first leg, Social Security itself, is facing a shortfall that will soon require a combination of tax increases and benefit cuts to pay for the boomers’ retirement—that is, unless the Republicans manage to dismantle and replace it with private accounts. The second leg is personal savings. Americans’ average personal savings rate is currently negative -0.7 percent, the lowest in the industrialized world and one of the lowest since the Great Depression. Nearly half of Americans have no retirement savings plan in place.
And the third leg on this increasingly wobbly construction? Pensions, a form of employer-based retirement plan that was available to half of all private-sector workers in 2000. Just 18 percent of the lowest-earning fifth have them, versus 73 percent for the richest.
The future of pensions is not looking bright. They’re why GM closed 12 plants and laid off 30,000 workers this year. Why Delta and Northwest Airlines declared bankruptcy earlier this fall, with an estimated shortfall of $16 billion between what they had promised workers and what they had in their pension funds. And they’re why New Yorkers are currently walking to work in the midst of a transit strike.
The New York Times (registration required) reported this morning that the M.T.A. came back with its final offer. Included along with some concessions was a surprise new demand that new transit workers contribute 6 percent of their wages to their own pension funds—three times more than current workers. The move would have saved the transit authority less than $20 million in the next three years, but the MTA said the change was needed to stem “a tidal wave” of future costs.
The Congressional Budget Office reports that nation’s private pension plans are collectively underfunded by approximately $600 billion, a sum one and a half times the size of the Department of Defense budget. The federal government has its own agency to assume the obligations of underfunded pension plans, the Pension Benefit Guaranty Corporation. But that agency has its own shortfall—$23 billion in 2005. That doesn’t even address the question of retirement health care. After a decade of double-digit premiums increases, states are starting to calculate their costs for their own employees and finding multi-billion dollar shortfalls there as well. Only one private company in 20 now offers these benefits.
The private and public commitments of the New Deal are dying off as fast as the generation that remembers FDR. In sheer numbers, most of the Boomers, as AARP members, will probably retain the clout to get the government to provide them with the basics of survival into their old age.
This continued gnawing away at the three legs of the retirement system will be the most costly to people coming up behind the Boomers, who are also the ones who think about this stuff the least. For some strange reason, the prospect of being old and unable to work has a tendency to slip into a dark, unreachable crevice in one’s brain, particularly if that day is three or four or five decades away. As the giant shortfalls indicate, companies and governments exhibit the same myopic tendency, chronically overlooking the need to someday pay for all those promises they made.
Anya Kamenetz blogs regularly at http://AnyaKamenetz.blogspot.com.