The Problems with Pensions Today
Who Benefits? The pension system is like the girl with a curl in the middle of her forehead. When it is good, it is very, very good, but when it is bad it is horrid. It's good for longer-term, higher-paid, better-educated workers at large companies but it is not so good for most other workers. At any point in time, fewer than 50% of workers have access to a plan, and that figure hasn't improved in the last 25 years. And there are significant differences in pension coverage by gender and by race.
According to a new government study (pdf), in 2003, only 27% of workers in small companies (less than 25 workers) had plans as compared to 50% at medium-sized companies (up to 99 workers) and 68% at larger companies (100 or more). Black, Hispanic and other non-white workers were less likely than whites to have a plan, and less than 30% of the lowest-income workers has plans as compared to over 70% of the highest-income workers.
The Changing Nature of the Retirement System. Over the last 20 years, the number of traditional pension plans, paid for by employers, and the workers covered by them has fallen drastically. Today, employers prefer to offer defined contribution plans, especially the popular "401k" plan. In a 401k plan, the responsibility for saving for retirement is placed on workers. They decide how much, if anything, to save each year and most must save something before employers contribute anything. They usually also have to decide how to invest their savings and bear all the risk of a market downturn or poor investment performance.
Saving for Retirement. The good news is that, at the end of 2003, 401k plans held almost $2 trillion in assets on behalf of 42 million workers. The bad news is that, given the trend to 401k plans in the workforce, not enough workers are saving for retirement and not enough are saving enough. A recent survey found that 58% of workers say they are saving for retirement but their savings are low; 45% of all workers have less than $25,000 in assets outside their homes. Despite this, most workers believe they will be able to retire comfortably.