The End of Retirement

The baby boomer generation -- they gave us pease, pot and microdots, the turbulence and successes of the 1960’s social movements, the micro-computer, arena rock and Reaganonimics. Love or hate them, they’ll be with us for decades. Now they're a generation facing retirement, and many of them will see that a life of retirement is going to bring new challenges, challenges that Americans have not seen since the Gilded Age of industry when retirement from work was only for the wealthy or the criminally insane.

Those who enjoy good health and longevity will be faced with the sobering conclusion that Social Security is not enough to maintain their current lifestyles and their 401K plans will not fill the disparity gap of income. The burden of deficient retirement funds will not only affect the Baby Boomers, it will have an impact on the American Economy as a whole. The millions of working citizens who will retire within the next ten years will have to drastically decrease their consumer spending and release many of their assets in order to afford the basic necessities of living. They simply will not have enough money to maintain their current lifestyles. The necessary decrease in consumer spending from the boomers could start with a ripple and end with a tidal wave, forcing companies to produce less goods and services and forcing workers out of their jobs. The trend in recent decades to shift the cost of retirement pensions from corporations to employees has forced millions to manage their own retirement plans, and consequently the majority of middle income earners are doing a lousy job at it.

How could this happen?

In 1978 a little know tax clause, the 401K, was amended to the IRS tax code as a measure to protect the retirement investments for executives at the Eastman Kodak company. The 401K, named after the section of the tax code in which it appears, is cash deferment program in which an executive can have his or her pre-tax contributions qualify towards an employer sponsored retirement supplemental plan. In short, the 401K clause was meant to be a supplement retirement plan for business executives.
The plan caught on, and by 1981 the 401K clause was expanded to include all employees who wish to participate, not just the executive staff. The plan that was designed as a suppliment to retirement becamce a release valve for employers, who up until then spent about 8% of payroll on retirement benefits for employees. The new plan put the burden of retirement on the worker, forcing the worker to make much larger contributions for retirement, in most cases the worker inputs 50% of the total retirement contributions, as well as forcing the worker to manage the progress of his or her investments plan - a daunting task for anyone.

Before 1981, employers paid and managed the retirement plans of its workers. But the traditional defined benefit system grew up in a very different socio-economic era. In the old days, American companies had little competition; America was king of the industry. American companies owned very large segments of business markets (market share), so naturally profits were high and the long term commitments of retirement plans were painless. It was, and still is, cost effective to provide subsidies for your employees, as a return the company is repaid with loyalty and dedication, and at that time most American companies were doing the same thing. Then a shift in competition, we were caught off of our guard. Towards the late 1970’s American companies began competing more with overseas firms, and the term "Made in Japan" began to have an imbedded quality previously unknown to us. American companies lost market share. The painless employer contribution retirement plans began to become a liability. Additionally, at this time, and to this day, many of our competitors did not have to provide their employees with long-term retirement benefits as those benefits are provided adaquatly by their governments through higher taxes. So when the opportunity presented itself to release corporations from the burden of the traditional defined benefit system, by and large most companies jumped.
Fast forward to 2006, about 15% of all private employees have a defined benefit (cradle to grave) retirement package, before 1981 the number of workers with a defined retirement benefit was as high as 60%.

Since the 401K plan we've seen a major shift in retirement resource allocation. So how is the 401K system doing? Not so well.
According to the Employee Benefit Research Institute; fewer than 50% of workers have access to a 401K plan and those who do have access do not set enough money aside required for the necessary returns to fund retirement. There is also the problem of poor fund management; many do not understand the nuances of investing, not to mention that durring the 2001 recession millions of people lost much of thier investments due to stock market fluctuations -- by no fault of there own. There are also are significant differences in pension coverage by gender and by race. According to a new government study, 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. These inequities will only spell one thing: trouble for retirees.

According to a recent PBS Frontline report there are far too many retiring and far too few with enough money for the essential necessities, housing, food, clothing, utilities. The newer corporate bankruptcy laws which allow corporations to defer their defined retirement packages to the tax payer, coupled with the lack of 401K supplements, is going to spell disaster for the Baby Boomer generation and those of us in their wake. There simply will not be enough money in the economy for the Baby Boomers to relax in their final years. They’ll have to keep working. Will this be the end of retirement? It certainly is the end of retirement as we know it.
In the years to come Baby Boomers will have a lot of unanswered questions about retirement, with the exception of one:
Would you like fries with that?