Life transitions are full of promise: graduation, first job, first baby. That's also true of retirement – if a person is financially prepared. But that's a big if, as employers shift from offering retirement plans guaranteeing income to ones emphasizing individual saving.
That shift has been going on for at least a decade, but it hasn't been without jolts, and now it needs smoothing out.
For years, millions of Americans have relied on employers for a traditional pension to supplement Social Security (this year, Social Security checks average about $1,000 each per month). But "old economy" companies such as airlines say they can't afford pensions anymore. And "new economy" firms such as Verizon no longer want to pay for them. So employers have been transitioning to 401(k)s, in which individuals bear the risk of building an adequate nest egg – often with some matching contributions from employers.
But this trend is leaving, or threatens to leave, many workers in the lurch. In recent years, major businesses have either defaulted on their traditional pension plans or frozen them. Right now, these plans, which cover 44 million Americans, are seriously underfunded by $450 billion. And the federal entity set up to insure against default or underfunding, the Pension Benefit Guaranty Corporation (PBGC), is itself in financial trouble, facing a $23 billion gap between its income and obligations.
It's not possible to stop the march to 401(k)s – 43 million Americans have those. But it is possible to prevent people still covered by traditional pensions from getting hurt in the process.
Congress took a first step in this direction last winter when it raised the premiums employers must pay for PBGC insurance by more than 50 percent. This will put the insurer on a more secure financial footing.
But for months, lawmakers on Capitol Hill have been wrangling over pension reforms for employers. So far, they've been able to agree that companies be allowed only seven years to reach 100 percent of plan funding, as opposed to as many as 30 years to reach 90 percent. That would force a company to face up to its obligations now, instead of much later when it might simply claim, "oops, we don't have the cash."
There's a risk that this and other requirements might hasten the rush to 401(k)s. But that exit is already well under way, and it seems wise to at least fully protect those left behind – present retirees and people in their 40s, 50s, and 60s who are counting on their employers to make good on their promises.
Still, Congress would be remiss if it focused only on traditional plans.
The future is private savings, but Americans, unfortunately, are lousy savers. Those participating in 401(k) plans aren't putting enough into them, and many people aren't in them at all. Again, lawmakers have been at odds over 401(k)s, but fortunately they at least agree on this: that employers should be encouraged to make 401(k) enrollment automatic, with workers facing only an opt-out decision instead of an opt-in one.
Much still needs to be done to ensure that Americans can retire comfortably – or afford to retire at all. Lawmakers can make progress on this issue but they are at least moving forward in areas where they agree.