Of Pensions, and Piggybanks: The Challenges of Ensuring a
Secure Retirement

by: Ellen Dannin

Employment Policy Research Network Report

January 27, 2011

http://employmentpolicy.org/topic/16/blog/pensions-and-piggybanks-challenges-ensuring-secure-retirement

Imagine that every week, decade after decade, you faithfully
put aside part of your pay in a special piggy bank to
provide for your golden years. But when you are ready to
retire, your employer takes all your savings back.

Or imagine that, instead of money, your employer deducts
money from your paycheck in exchange for IOUs stamped:
"Money to paid upon retirement." But when you retire, your
employer says no money has been put aside for you.

You did nothing wrong, but you will not have a secure
retirement.

This is the plight of many employees today. They agreed to
defer part of their income for their retirement, but their
employers have not kept their side of the bargain. Surely,
New Jersey wins the prize for absconding with money owed its
public employees. It put so much money on its tab that it
now owes $53.9 billion in pension funds But rather than do
the right and moral thing, Governor Christie blames the
victims. Oddly enough, instead of public outrage over this
broken promise, many people are attacking the employees who
had - but now have lost - good retirement and health care
plans.

Across this country, both private and public sector workers'
retirement income is in peril. Attacking public employees'
benefits will not help private sector employees. Rather,
everyone needs to work together to understand what has gone
wrong so we can fix the problem and ensure we keep our
promises. Here is some basic information about ensuring
people can have a secure retirement.

First, having adequate income in retirement depends on some
combination of Social Security, defined benefit pensions,
defined contribution retirement balances in IRAs or 401(k)s,
savings, and equity in one's house.

Not everyone will have all of these resources. The fewer
resources available, the more a person's retirement is at
risk.

Social Security is the bedrock for most American workers.
But many public sector employees are not allowed to draw on
Social Security or they get only a much reduced payout, even
if they have paid enough into Social Security to qualify for
benefits. As a result, public employees tend to depend far
more on their pensions than private sector employees whose
pensions top up their Social Security benefits.

Second, pooling savings among as large a group as possible
helps smooth out problems by allowing good years to shore up
bad years. The Social Security pool is increased for private
sector workers by the many public sector employees who pay
in but cannot collect Social Security.

Defined benefit pensions are also strengthened by pooling.
In addition, private sector employees' defined benefit
pensions are insured through the Pension Benefit Guaranty
Corporation (PBGC), but public employee pensions are not
protected by the PBGC. One down side of defined benefit
pensions is that they have vesting and years of service
rules that tie employees to an employer in order to receive
a full pension.

In recent years, many private sector employers have done
away with defined benefit pensions and either replaced them
with no retirement plan or 401(k) plans. 401(k) belong to
the employee, not a specific employer, so they are portable.
But the money is in individual accounts and not pooled. As a
result, individual accounts puts money saved for retirement
at risk. Sadly, many have recently learned just how
vulnerable unpooled retirement accounts are to shifts in
financial markets. Many workers, who were part of the
ownership society, have seen their 401(k) balances crash,
leaving them with insufficient retirement income.

We hear a lot about how well Social Security is funded.
Fortunately, any funding problems it has are easy to fix.
Right now no Social Security taxes are paid on income over
$107,000. This cap lets those who could certainly afford to
pay the same percentage of their income into Social Security
as those paid minimum wage off the hook. If the cap were
removed, Social Security would be solvent forever.

The real retirement funding crisis involves owners of 401(k)
s who have not paid in the amounts needed to for their
retirements. According to a 2010 EBRI report, almost half of
people aged 36 through 62 are at risk of not having enough
retirement income to pay for "basic" expenditures and
uninsured health care costs. The $6.6 trillion gap in 401(k)
funding means that generations of American retirees will be
hard put to support themselves in retirement, even if they
get Social Security benefits.

People have not paid into their 401(k)s because wages have
not kept up with inflation. The millions of workers who have
been hard pressed just to pay for the bare necessities -
food and shelter - cannot put aside any money for retirement
and are unenthusiastic and even resentful about paying the
taxes necessary to support the cost of government.

To solve our retirement problem, then, we must understand
why have so many Americans slipped into poverty.

The decline in pay tracks the gradual decline in union
representation and the loss of union power to demand decent
pay and benefits. Union representation has been lost, not
because employees wanted to be free to negotiate on their
own, but because trade and other policies have sent our best
paying jobs overseas. You can see the results in the now
blighted, once prosperous towns throughout our country. And
you can see the results in the faces of so many people who
will not have a secure and dignified retirement.

It diminishes us as a people when we cannot ensure that
everyone will have a secure retirement. Only by coming
together can we ensure that everyone can retire with enough
money to live in dignity.

Here are links to additional information on pensions and
public employees.

The CEPR Social Security Benefit Calculator This calculator
estimates your family monthly income during retirement and
compares it to other households in your county with similar
demographics - your race, age, and marital status.
Alternatively, you may compare to the state as a whole. In
some cases, the available data may be insufficient to obtain
a reasonable comparison. In such cases, the comparison will
be to the overall county or state average.
http://www.cepr.net/calculators/calc_socialsecurity.html

N.J. Senate President Sweeney says state must pay into
pension system for reform to happen
http://www.nj.com/news/index.ssf/2011/01/sweeney_says_nj_must_start_pay.html

Unfunded N.J. pension liability grows to $53.9B
http://www.nj.com/news/index.ssf/2010/12/nj_pension_shortfall_grows_mor.html

National Institute on Retirement Security Policy Conference,
Raising the Bar: Policy Solutions for Improving Retirement
Security
http://www.nirsonline.org/storage/nirs/documents/conferencereport.pdf

Kathy Ruffing and Paul N. Van de Water, Social Security
Benefits are Modest: Policymakers Have Only Limited Room to
Reduce Benefits Without Causing Hardship January 11, 2011
http://www.cbpp.org/cms/index.cfm?fa=view&id=3368

EBRI, A Post-Crisis Assessment of Retirement Income Adequacy
for Baby Boomers and Gen Xers, Feb. 2011
http://www.ebri.org/pdf/briefspdf/IB.Feb11.Post-Crisis_RetIncAd.FinalFlow.pdf

Income Inequality Grew Across the Country over the past Two
Decades: Early Signs Suggest Inequality Now Growing Again
After Brief Interruption
http://www.cbpp.org/cms/?fa=view&id=978

Jeffrey H. Keefe, Are New Jersey Public Employees Overpaid?
http://employmentpolicy.org/topic/15/research/are-new-jersey-public-employees-overpaid

[Ellen Dannin is the Fannie Weiss Distinguished Faculty
Scholar and Professor of Law at Pennsylvania State
University. She joined the Penn State Dickinson School of
Law faculty in 2006 after teaching at Wayne State University
Law School and in San Diego at California Western School of
Law.

Dannin writes primarily in the areas of collective
bargaining, privatization, New Zealand labour law, and legal
education. She is a prolific writer of both scholarly
articles and popular pieces. She is the author of Taking
Back the Workers' Law - How to Fight the Assault on Labor
Rights and Working Free: The Origins and Impact of New
Zealand's Employment Contracts Act.

Before entering teaching, Dannin was a trial attorney with
the National Labor Relations Board. She regularly teaches
courses in labor law and employment law and has taught
various labor law seminars and public sector labor law.

Dannin earned her bachelor's degree and J.D. from the
University of Michigan.]

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