Too many lack retirement funds

Tuesday , March 18, 2014 - 10:51 AM

Vijay K. Mathur

The retirement income stream of Americans depends upon various forms of wealth they have accumulated over their working years. Wealth could be in the form of accumulation in Social Security, pension funds, financial assets, and housing and other real estate. However a large fraction of retirees, and those who are ready to retire, do not have sufficient assets in pensions, and other financial assets.

A significant fraction of elderly persons depend upon Social Security income. However, that may not be sufficient to meet all needs with increasing life expectancy and early retirement. There are two major types of tax-deferred pension plans in addition to Social Security. In defined benefit plans, a retiree gets a guaranteed monthly payment for life funded by the employer and the worker. The pension amount is based upon a formula that includes salary, age and years of service. The guaranteed payment in DB plans works like an annuity, as in Social Security. DB plans become more expensive if retirees live longer and retire earlier, as is happening in the U.S. and other countries. Hence, employers are increasingly abandoning DB plans.

The other type of pension plans are called defined contribution plans. These plans, for example, 401(k), 403(b) and individual retirement accounts, have gained in popularity with employers and have bypassed DB plans since the late 80s. These plans are funded mainly by employees and sometimes supported by employers' contributions. Contributions are invested in funds, e.g., bond funds, stock funds, and real estate investment trust funds, offered from the list of funds offered by employers. Employers are not responsible for the accumulated value of assets in those chosen funds. However, Ellen Schultz, investigative reporter of The Wall Street Journal, reports in her book, "Retirement Heist," that the IRS rule on "anti-discrimination" has been used by employers to shut out lower-paid employees from 401(k) plans to boost the contributions for higher-paid employees.

In DC plans there is no guaranteed amount of benefits at the time of retirement. Retirees could buy an annuity by using those assets for life or for any fixed time period or a lump-sum payment at the time of retirement.

Alan Gustman, Thomas Steinmier and Nahid Tabatabai, in "The Journal of Economic Perspectives," Winter 2010, show that households, in the near-retirement group aged 53-58 as of 2006, in the bottom half of the wealth distribution, had wealth shares varying on average between 40.6 percent and 89.9 percent in Social Security, 2.3 percent to 14.5 percent in DB plans, 1.4 percent to 6.4 percent in DC plans and 5.8 percent to 22.5 percent in housing. For these households in the median range of the wealth distribution, Social Security accounted for 40.6 percent of the wealth share and only 20.9 percent of the wealth share in pension plans. That indicates significant reliance upon Social Security.

James Poterba, Seven Venti and David Wise in "The Journal of Economic Perspectives," Fall 2011, show that half of households in the age group 65-69 in 2008 had no DB pension plans, only $15,000 in financial assets, and $5000 in IRAs. They too are heavily dependent upon Social Security. They have more wealth tied to housing and real estate that the 53-58 group, but that does not provide a viable source of income given the fact that since 2006, housing prices nationally declined almost 30 percent. Moreover, most retirees tap the value of housing in emergencies and/or later years in their retirement.

Author Schultz argues that loopholes in pension laws allow major companies to use employees' and retirees' pension funds as piggy banks to boost corporate earnings, retirement and deferred compensation for top executives, early retirement for selected employees and corporate restructuring. She shows, in episodes after episodes, how DB plan surplus funds have been misused by businesses to the detriment of employees' and retirees' pensions, thereby converting surpluses into deficits.

Only Congress can stop this misuse of pension funds. Since DC plans are now being commonly used, Congress should pass laws to make sure that all employees -- full-time as well as part-time -- who wish to participate in 401(k) plans are not excluded from participation, and that the control of DC plan funds is in the hands of employees and not employers. Employees should deal directly with investment funds and their certified brokers without any meddling by the employers.

Given the funding pressures faced by all entitlements, a significant fraction of elderly Americans must cope with the reality that they will not be able to support their lifestyle with Social Security income and meager pensions.

The reliability of employer-based pension plans, given the current pension laws, is also questionable. This leaves the option of financial wealth accumulation through personal savings and prudent investment of those savings in index funds, less affected by the volatility of the stock market.

The essential ingredient for retirement savings and investment is a long-time horizon. All Americans should get educated about their financial affairs because their future economic well-being in retirement depends upon how they handle their financial affairs during their working years.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, at Cleveland State University, Cleveland, Ohio. His articles also appear at He writes original blogs for the Standard-Examiner at

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