Retirement security is fast becoming a goal beyond the reach of most Americans. Our private pension system is fraying, with fewer workers now covered by pension plans. Companies increasingly view bankruptcy as a business strategy to eliminate pensions, and even healthy companies are reneging on decades-old commitments to help provide their employees with a secure retirement.
The bankruptcy code provides little protection for workers’ retirement security. With the law’s emphasis on facilitating reorganization at almost any cost, companies in entire industries are shedding their pension obligations with hardly a look back and workers who lose pensions are unable to pursue a claim for those benefits in court. A buyer looking for assets in bankruptcy knows that employee obligations can be shed with relative ease through the use of the law’s “free and clear” sale provisions; accordingly, companies in bankruptcy shirk their pension obligations by selling their assets to leave companies that are unable to fund workers’ pensions.
A succession of healthy companies with marquee names and well-funded plans are also turning their backs on their pension promises by freezing their plans or closing them to new hires. Many other companies are soon to follow, likely to cite changes in pension funding requirements, prospective new accounting rules, globalization and/or competitive pressures within their industries. Regardless of the validity of these explanations, workers will pay the price because they will be losing sorely needed retirement income.
Although workers’ ability to achieve retirement security has long been premised on a system of mutual responsibility – government-provided Social Security, employer-provided pensions, and personal savings – only Social Security now guarantees a universal benefit. Only one-tenth (11 percent) of private-sector employers now sponsor a defined benefit pension plan, covering one-fifth (21% ) of private-sector workers (down from nearly two-fifths of workers a quarter century ago). For non-union workers, the situation is even more dire: only 15 percent of non-union workers have defined benefit pension plans, compared to 72 percent of union workers. And even this limited coverage is on the decline.
Across the country, the retirement security of public employees is also under attack through efforts to replace defined benefit pension plans with riskier defined contribution plans. Both Michigan and Alaska have closed their defined benefit pension plans to new hires. In Maine, Georgia, Illinois, Kansas, Minnesota, New Mexico, South Carolina and Virginia, a similar threat now looms.
These trends portend poorly, not only for the economic health of our retirees, but also for the nation overall. Most of our 76 million baby boomers will face retirement with fewer assets than previous generations, if they are able to retire at all, and many will be forced to remain in the workforce to stave off poverty. These seniors, who will comprise an increasing share of the population, will be without the purchasing power that is needed for a healthy economy.
The facts about how much workers are saving for retirement are sobering and offer no hope that 401(k)s or other defined contribution plans will make up for the loss of traditional pensions without major changes, both in the design of the plans and the level of contributions. The average employer contribution to a defined benefit plan secures an individual worker a lifetime pension benefit worth $400,000. By contrast, half of all American families have no retirement savings whatsoever. Among families close to retirement (those headed by someone aged 55 to 64), nearly two in five have no retirement savings in a 401(k), IRA or other defined contribution account. Among those near-retirement families lucky enough to have some retirement savings, half have less than $83,000 – enough for a monthly retirement income at age 65 of only several hundred dollars.
Moreover, individual savings plans, like 401(k) plans and IRAs, as they exist today, cannot offer all the benefits of real pensions. Well-designed defined benefit pension plans provide benefits for all covered workers, provide lifetime retirement income, deliver valuable survivor and disability protections, and may offer important early retirement benefits and post-retirement benefit increases. By contrast, individual savings plans require workers to bear all the risk, are often insufficiently diversified, suffer from poor returns and typically carry very heavy fees and expenses. (According to a study by the authoritative National Association of State Retirement Administrators, the average expense ratio for defined contribution plans runs as high as 2 percent, compared to 0.25 percent for large defined benefit plans.)
A clear vision and bold action are required to address our retirement security crisis and to secure adequate and guaranteed lifetime retirement income for all American workers. The AFL‑CIO calls on the Congress and the President to enact legislation guided by the following principles, and sets out the following policies as meeting those principles:
Principles to Guide the Delivery of Retirement Income
- Retirement security should be based on mutual responsibility, with financing and risk allocated equitably among government, employers, and workers;
- Every full-career worker should have the opportunity to retire at 65 with at least 70 percent of his or her pre-retirement income;
- Retirement benefits should be portable;
- Defined contribution plans should be structured to serve the interest of workers, not those of their employers or Wall Street;
- Retirement plan participants should be represented in the governance of their plans.
Policies to Achieve Retirement Security for American Workers
- Strengthen Social Security: The bedrock of retirement security for America’s working families is Social Security. While we successfully defeated the Bush Administration’s attempt to privatize Social Security in 2005, we must continue to fight all such efforts. Similarly, we must oppose attempts to switch public employee defined benefit pensions to defined contribution plans. Beyond this, we need to work for improvements in Social Security, at least to provide above poverty-level benefits for workers who put in a full career at low-wage jobs and to improve the retirement security of women.
- Ensure employer responsibility: All employers should be required to fund retirement benefits on top of Social Security, as an essential part of every worker’s pay. The most effective and efficient way to do this is through a defined benefit pension plan. Private-sector employers who don’t provide such a plan should be required to contribute into either a supplementary Social Security plan or a government-sponsored annuity plan that builds on existing programs, e.g., state employees’ pension systems.
- Curb corporate abuse of the bankruptcy process: All workers should have a claim in bankruptcy court for lost pensions, just like unpaid wages. Today, only the PBGC can pursue such a claim and regardless of what it realizes, the PBGC will not pay pension beneficiaries more than the PBGC-ensured limits. Companies should be precluded from selling assets to escape their pension obligations. Today, companies in bankruptcy will sell their assets “free and clear,” leaving nothing but shell companies to fund employee benefits.
- Improve defined contribution plans: Employers should be given the flexibility to provide benefits through qualified defined contribution plans, but not as a substitute for their contribution to the defined benefit system. The design of worker savings plans should be improved to make worker contributions to employer-provided defined contribution the default option for workers. Requiring employer contributions to worker savings plans, like defined contribution plans, should also be considered.
- Make all retirement savings vehicles effective and efficient: Many 401(k)’s and IRA’s are not operated in the best interests of Americans straining to save for retirement. Reducing the big fees paid out of workers’ retirement accounts can yield both enormous aggregate savings and meaningful improvements in individual workers’ retirement security. Making sure plans are structured and operated so that saving, investment and distribution decisions are simple also will improve Americans’ retirement security.