There’s been a lot of talk lately about the need to fix the “broken” 401(k) plan. Some say it disproportionately benefits higher-paid workers; some claim it can’t provide a level of retirement income sufficient to meet lower-income needs; and still others maintain it can’t provide that level of security for anyone. And, as often as not, those sentiments arise as part of a discussion where folks, including retirement plan advisors, wistfully talk about the “good old days” when everybody had a defined benefit pension, and people didn’t have to worry about saving for retirement.
The only problem is — those “good old days” never really existed, nor were they as good as we remember.
Consider that only a quarter of those age 65 or older had pension income in 1975, the year after ERISA was signed into law. The highest level ever was the early 1990s, when fewer than 4 in 10 (both public- and private-sector workers) reported pension income, according to EBRI tabulations of the 1976–2011 Current Population Survey. (In 2010, 34 percent had pension income.)
Perhaps more telling is that that pension income, vital as it surely has been for some, represented just 20 percent of all the income received by those 65 and older in 2010. In the “good old days” of 1975, it was less than 15 percent.
In fact, in 1979, just 28 percent of private-sector workers were covered “only” by a DB plan (another 10 percent were covered by both a DB and a DC plan), according to Department of Labor Form 5500 Summaries. In other words, even in the “good old days” when “everybody” supposedly had a pension, the reality is that most workers in the private sector did not.
Even among those who did have a pension, most in the private sector weren’t working long enough with a single employer to accumulate the service levels you need for a full pension. This is not a recent phenomenon; median job tenure of the total workforce has hovered around four years since the early 1950s. In fact, as EBRI’s latest research points out, the average median job tenure has now risen to 5.2 years (EBRI Notes, December 2010). For private-sector workers, fewer than 1 in 5 have ever spent 25 years or more with one employer. Under pension accrual formulas, those kind of numbers mean that even among workers who qualify for a pension, many are likely to receive a negligible amount because their job tenure is so short.
Ultimately this suggests that even when defined benefit pensions were more prevalent than they are today, most Americans still had to worry about retirement income shortfalls.
Indeed, Americans today do have some additional concerns: longer lives and longer retirements to fund, as well as the attendant issues of higher health care costs and long-term care. For most workers — past and present — the more savings options they have, the better; and the easier we make it for them to save, the better. That is the power of payroll deduction, matching contributions and employer action.
When all is said and done, we’re all still challenged to find the combination of funding — Social Security, personal savings and employment-based retirement programs — to provide for a financially satisfying retirement.
Just like in the “good old days.”