Retirement in America Part IV: Pension Problems and Social Security Shortfalls
It’s impossible to discuss the retirement crisis without addressing the decline of traditional middle class safety nets like pension plans and social security. Access to pension plans has declined dramatically, while funding shortfalls threaten those that remain, and Social Security appears headed for insolvency at some point in the next two decades.
Pensions in Peril
In 1980, the percentage of Americans participating in a defined benefit (DB) pension plan was nearly 40%. By 2017, only 15% of private sector workers were participating, according to Bureau of Labor Statistics data. Government Accountability Office data shows that the number of defined benefit plans shrunk from 103,000 in 1975 to less than 46,000 in 2015.
Much of this shift can be attributed to a decline in union membership and bargaining power among workers, as well as the rise of defined contribution (DC) plans like 401(k)s, which proliferated from 207,000 to 648,000 between 1975 and 2015. 401(k)s allowed employers to continue contributing to the retirement savings of employers, but without the substantial long-term guarantees of pensions.
Besides the lack of guaranteed retirement income for workers that has disappeared alongside so many DB plans, the retirement crisis has been exacerbated by pension shortfalls. According to a December 2017 study by Boston College, multiemployer defined benefit plans face a $553 billion dollar funding shortfall in 2018, while research from The Pew Charitable Trusts puts the pension shortfall of all 50 states public pension systems at more than $1 trillion.
These shortfalls can be blamed on a number of factors, from ill-advised actuarial assumptions to the devastating impact of the 2008 financial crisis, and in some cases poor investment decisions as they attempted to make up for the losses of 2008.
The Pension Benefit Guarantee Corporation (PBGC) was established by the U.S. government to ensure that private sector pension participants received the benefits they were guaranteed. Unfortunately, according to its own reporting, the PBGC’s Multiemployer Insurance Program faces insolvency by 2025.
Other than guaranteed pension income, retired Americans have for decades been able to rely on monthly Social Security benefits to supplement their retirement savings. Unfortunately for those workers who have been paying taxes into this program for their entire careers, Social Security’s costs will exceed its income in 2020.
Even more distressing for people who rely or plan to rely on Social Security for retirement income, the program is projected to become insolvent by 2035. If that were allowed to happen, Social Security – which currently provides income to 67 million Americans – would be forced to impose a 20% cut to all benefits. This could prove difficult to overcome for the nearly half of retired Americans who currently rely upon Social Security for a majority of their income.
Historically, cuts to Social Security are a political hot potato that can typically bring about bipartisan solutions. We’ll see if that holds true over the next few years.
Check out Retirement in America Part III: Plugging the Leaks in the Hull of American Retirement, and stay tuned for the final part of the series.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.