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New Pensions Offer Opportunities and Risks

Pensions in the United States are evolving from a guarantee of cash and benefits to a riskier environment where workers may or may not fare well in their old age, in part due to factors beyond their control.

That elderly person greeting shoppers or stocking shelves at a U.S. retail store may not necessarily be there because he or she is bored with retirement. A growing number of retirement-age workers are still on the job out of necessity because their pensions and other benefits have been reduced or eliminated.

In recent years, many U.S. companies have abandoned or limited access to traditional pensions that are based on a percentage of a worker's salary multiplied by years of employment - - a "defined benefit" pension. Those companies have typically replaced that with a "defined contribution" pension, based on how much a worker has put into the plan out of his or her own wages, perhaps supplemented by the company.

Reasons for Change

Why has this happened? Lynn Dudley, Vice President of a pension provider's group called the American Benefits Council, says companies did it to please their employees. She says, "Many companies that shifted from a defined benefit plan to a defined contribution plan did so because their work force demanded it, because they[i.e., workers] aren't going to stay with that particular company through their whole career. And so, if you're not going to stay there, chances are you're not going to accumulate a very sizable benefit."

Dudley's explanation is rejected by John Rother, Director of Policy for the advocacy group, the American Association of Retired Persons. He says the pension shift is a matter of corporate indifference.

According to Rother, "Employers wanted to save money, and because they no longer feel an obligation to take care of their employees over their whole careers and into retirement. And so their message to their employees is, 'You're on your own!'"

But Ken Goldstein, with the New York - based business group, The Conference Board, offers a third explanation - - market competition. He says, "One thing that's driving all of this is that we are in a world where companies - - and it doesn't matter what the industry is - - cannot depend on raising prices and thereby generate more revenue in order to cover their costs, including these defined benefit [pension] costs."

The U.S. Pension Benefit Guarantee Corporation, a government agency set up to protect those who receive or will receive a defined-benefit pension, says there are currently 44 million Americans enrolled in more than 30-thousand such plans. Time magazine reports that about 20 years ago, the number of corporate defined-benefit pensions was almost four times larger.

Many companies no longer offer defined benefit plans to newer employees, and have shifted them to other pensions. Analyst Jack VanDerehi, at the private Washington-based Employee Benefits Research Institute, says his latest survey of households and pensions shows that a generational divide has emerged.

VanDerehi contends, " Currently, [on the question] 'Whether your or your spouse has a defined benefit plan, we're showing [an overall rate of] 40 percent. If you're over 45 [years old] that number goes up to 47 percent. If you're under 45, that number drops to 33 percent."

Risky Investments

The shift in pension plans has also brought about a change in who is responsible for its performance. In traditional defined-benefit plans, the pension provider must look after the investments that generate the funds to pay pensioners. But in defined-contribution pensions, which the U.S. Chamber of Commerce says now cover more than 48 million employees in at least 674-thousand plans, individual employees have to decide how to invest that money.

Christian Weller, with the Washington-based public policy research group the Center for American Progress, says many people are not savvy in the ways of investing, and don't see taking on this responsibility as a positive development. Weller says, "If you shift the risks [from the corporation to the worker], you get the chance that a lot of people will do fairly poorly in the [investment] market. There's no appetite for taking on more risks at the family level. People don't want to have more risk; they actually want less risk. And I think in the long run the government will actually have to step in and create new social programs to help the losers."

Weller says that, for example, some people's retirement funds may get wiped out because the stocks they pick lose their value or they become involved in fraudulent "get rich quick" schemes. But he says lawmakers appear to be willing to construct a "safety net" for these investors.

According to Weller, "There's a very strong interest between conservatives and progressives to take the new and much more risky forms of retirement savings - - individual accounts or defined-contribution plans - - and make them look a lot more like pensions, to introduce a lot more safety and security in them, and to reduce as much risk as possible under those plans. There's a lot of bipartisan appetite for doing that."

Part of the pressure on lawmakers to put stronger protections in defined-contribution and savings plans comes from retiree-advocacy groups such as the American Association of Retired Persons, where Director of Policy John Rother points out another looming problem. He says the next group of retirees, the so-called "Baby Boomers," born between 1946 and 1964, seems to be oblivious to the cold financial realities it will face.

"The current retired generation had a strong savings ethic," says Rother. "'Boomers,' on the other hand, have a much weaker savings ethic. Today, it's pretty much a 'consumption' economy. Many people, even with very adequate incomes, are living paycheck-to-paycheck. And what's going to happen when these people reach retirement age? Then they're really going to be in trouble."

Many analysts say that the new realities of pensions and retirement provides both options and risks. And because of that, workers must take personal responsibility for charting their futures. But they also say the government must be ready and willing to step in to make sure that these changes don't create a new, desperate class of elderly Americans.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.