Tuesday, December 11, 2012


 I.B.M. recently announced it is only going to contribute to employee 401K plans once a year on December 31.  If you leave the company on December 30th, you lose a year's worth of benefit.  Once at the forefront of offering generous employee benefits, I.B.M. is now going down the same road of most of corporate America and cutting or limiting retirement contributions.  Being an I.B. Memer isn't what it used to be.

     We need a new retirement model.  The old one is dying the death of a thousand cuts.  Defined benefit plans are gone.  (where earnings and years of employment produced a fixed sum each month)  401K plans are inadequate to meet the needs of most Americans.  Social Security cannot support retirement by itself and most Americans have little in savings accounts.

     401K plans were sold as equal to defined benefit plans.  They were going to provide for a comfortable retirement.  It was always a lie.  Americans are not financially sophisticated.  Fees, and other charges, quickly eat up much of the money being put into 401k's.  Employers never ponied up as much in contributions as promised.  Many Americans treated these plans like savings accounts leaving them sitting, not monitoring them annually and unaware of whether or not they were producing the necessary revenue for retirement.  This is true for Americans who have such plans, however most do not have anything, or started so late in life there won't be enough to support them.

     The single most important aspect of 401K plans is the mix of stocks, bonds etc. in the package.  Most Americans have no idea how to navigate Wall Street and how to re-balance the mix to produce the maximum return.  Even more troubling is the recent experience of a Wall Street collapse which wiped out most of the gains accumulated over years of contributions.  If you were 55 years old in 2007, and watched 50% of your 401K savings disappear, you don't have enough years left to rebuild what you had.  While those who sunk Wall Street have returned to record profits, most Americans sit up at night wondering how they will make ends meet and can they continue to work into their 70's.

     All of the above is the reason unions have fought so hard to protect pension benefits.  Unions are one of the few places where this issue is still on the front burner.  Ironically, despite contracts spelling out pensions and benefits...despite years of agreements about company obligations...despite promises in writing...the American courts have allowed companies to cut and run from these obligations.  Courts have allowed companies like United Airlines to go into bankruptcy and end all of their pension obligations.  People who worked 30 plus years playing by the rules find themselves out in the cold with their pensions cut by 90%.  Putting icing on the cake is the fact whatever obligations were left were dumped on a government agency and became a taxpayer liability.  Justice for all is an illusion in this country if the "all" is working, middle class Americans.

     No one is talking about this.  This is the real fiscal cliff.  This is the real economic time bomb.  No one in Washington is addressing this issue at all.  It's as if they believe there will be a pension fairy leaving checks under pillows of Americans when they retire.  Instead, we debate whether the rich should see their tax rates rise.  We hear proposals to end the inheritance tax and we watch as the Mitt Romney's of the world pay virtually nothing in income taxes because their wealth comes from investments which produce "carried interest" taxed at maybe 15%.

     My children face a future of trying to put aside enough resources for retirement.  They are left at the mercy of a bet placed at the world's biggest casino, Wall Street.  They face a future so insecure as to create an anxiety which will permeate all of our society.  It doesn't have to be like this.

     We need a new model.  I am not smart enough to offer a concise framework of what that model should look like, but I know the current system is broken and can't be fixed.  This new model could take advantage of some things already in place.  We already have the mechanism to withhold wages for income tax purposes.  Why can't we do the same for retirement savings?  Why can't we have a vehicle in which we determine what percentage of our "pre-tax" income we want withheld for retirement?  The funds could be invested in a conservative strategy aimed at long-term growth.  An agency could be created to manage the funds.  Everyone would know the formula.  You put away X amount for Y years and this is how much you will get at 65 or 70 or whatever the retirement age is at the time.  Americans could vary the contribution levels once a year. (maybe 2% when you are young, but 5% as you make more money)  Annual statements would-be issued.  Your employer would have to contribute to this fund as well.  (I would like employer contributions to be at least twice the rate an individual has chosen to be withheld.)

     Corporate America should love this idea.  They no longer would have pension obligations to worry about.  This would also cut down on the need for government, and private charities, to provide for those who don't have retirement accounts.  Americans would be able to feel secure about their future.  Between Social Security, Medicare and this new system, Americans wouldn't fear aging and all that comes with it and wouldn't be nearly as much a burden on their families.

     I am not smart enough to have covered all the holes and problems with my suggestion.  There are people who are smart enough, but they aren't talking or even focusing on this coming disaster.  The model is broken.  It's every man and woman for themselves as it stands now.  The gap between the 1% and everyone else will continue to widen as this financial nightmare increases in scope and infects our dreams.

1 comment:

  1. great post. scares me that it is broken as well.