By Hedrick Smith
FRONTLINE correspondent Hedrick Smith investigates the looming financial crisis for middle-class Americans nearing retirement in a special report, Can You Afford to Retire?
The report airs Tuesday, May 16, at 9 p.m. on PBS (check your local listings).
AFL-CIO Now Senior Writer James Parks recently interviewed Smith about America’s retirement future.
Question: Companies that have declared bankruptcy, as well as companies that are doing well, are dumping pension plans. Today, less than half the workforce has a private pension. How can that be squared with the near record levels of the stock market, which implies that companies are awash in money?
Smith: Clearly, the primary motivation of companies to terminate pension plans is to save money. Since the mid-1970s, corporations have shifted much of the responsibility for pensions to employees. A recent U.S. Department of Labor study said in the 1970s employers paid 89 percent of the cost of retirement and employees 11 percent. In 2000, employees paid 51 percent and employers 49 percent. Now, people are having to pay for themselves, and it’s a horrendous situation.
Q.: As a result of companies dropping pensions, the Pension Benefit Guaranty Corporation (PBGC), the agency that insures private pensions, is running a $23 billion deficit. President Bush has proposed requiring companies to put more money into pension funds. Is that the answer?
Smith: There is no question that the loopholes in funding rules are one of the reasons PBGC estimates there are 18,000 companies that have underfunded pensions to the tune of $450 billion. The companies are saying if you tighten the rules and make us do what we promised to do for our employees—provide a pension—then we’re going to stop having a pension. While lots of companies are dumping pensions, American Airlines and U.S. Steel are funding their pensions. They may pay smaller benefits, but it’s one thing to do it collaboratively with employees through collective bargaining, and another to say, “Sorry folks we can’t do it anymore. It’s up to you.”
Q.: Experts say for Americans to maintain their standard of living, even those with pensions or 401(k) type plans will need to save 15–18 percent of their salary, every year, over 30 years. With wages stagnating and health benefits declining, how realistic is it to expect workers to put aside money for the future when they can’t afford to pay bills today?
Smith: One of the things that disturbed me most in reporting this story is how little people know about how much money they’re going to need for retirement. If you make $50,000 a year, experts are saying you have to have eight to 10 times that amount of money—$400,000—in order to cover yourself for the 18 or so years you’re likely to live in retirement. Most people are happy if they save $100,000, but they are going to need multiples of that or else they will be living on Social Security, which will mean a steep drop in pay.
Q.: The traditional three pillars of retirement security—Social Security, pensions and savings—are all in jeopardy. How did this happen?
Smith: We got to this place because we’re not saving enough as a country. We’re a credit card society. People have an “I-want-to-spend-it-now attitude” and when they get to their 60s and 70s, they don’t have enough money.
Our economic incentives are such that Wall Street focuses today on the profits of companies and doesn’t worry about how it's treating employees and retirees. Also, there is the dramatic downsizing of industries such as steel, the airlines and the loss of the manufacturing industry.
Q.: Retirees make up about 20 percent of our economy. With longer life expectancies, it’s possible that millions of retirees will outlive their pensions. What would be the impact on the overall economy if suddenly millions of seniors ran out of money?
Smith: Right now, we’re in a transition period where 70 percent to 80 percent of retirees have only a 401(k) and Social Security. Two-thirds of those people are going to run out of their 401(k) money in seven, eight, nine years and they’re still going to live another decade. Living only on Social Security is not only going to be painful on them, it’s going to be painful on the economy. Instead of our economy growing 3 percent to 4 percent a year, maybe it will be 1 percent to 2 percent.
Q.: Will we see more people having to put off retirement in order to keep their standard of living?
Smith: This is going to be an economic necessity. People are not going to have a choice. They may change their career, but it looks pretty clear that working longer is the only option many people are going to have to meet their financial needs in their senior years.
Q.: What can unions do to change the future for retirement?
Smith: Unions have to be much more realistic than they have in the past. Unions were inclined in the past to accept pension promises from companies that have been in financial trouble and did not want to pay higher wages. If we’re going to deal with this crisis, everyone has to be more honest about it—the individual, the unions, the corporations, the government and the public.
I think unions need to go to our public officials and say this is a huge problem, and we need to sit down and discuss it instead of shouting and pointing fingers across the table. We need to set up the kind of bipartisan labor-management commission that actually starts to work out long-term solutions.
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Hedrick Smith was The New York Times USSR correspondent in the 1980s, when he authored The Russians. Some of Smith’s other publications include The Power Game: How Washington Works and The Media and the Gulf War: The Press and Democracy in Wartime. Find out more at www.hedricksmith.com.
