America’s Ten Crises: Part 5: (A Fundamentally Broken Retirement System)
THE FOLLOWING IS THE FIFTH ENTRY IN THE SEQUENCE OF ‘AMERICA’S TEN CRISES’ POSTINGS, ADDRESSING THE TOPIC OF THE BROKEN POST-1945 RETIREMENT SYSTEM IN THE U.S.
The retirement system established in the U.S. in the late 1940s is today in a state of severe collapse—and with it the incomes of most of the more than 45 million Americans presently retired and the 77 million ‘babyboomers’ that will soon do so over the next decade. That system was built upon three elements: Social Security retirement benefits, defined benefit pensions, and personal savings. Each was supposed to provide one-third of the necessary income for the retired after age 65. Each of the three elements have been consciously weakened and undermined since the 1980s.
The first attack was leveled against defined benefit pensions that guaranteed a given income stream for retirees. 401k personal pension plans were introduced in the early 1980s to replace DBPs, and progressively have done so for the past three decades. 401ks remove all liability from companies to provide guaranteed retirement benefits but retain all the tax advantages to corporations. They also allow financial institutions and stock traders to siphon off the retirement funds and speculate with the funds. In the past decade alone more than $4 trillion in value in 401k and pension funding has been ‘lost’ to financial speculation. After three decades of policies aimed at undermining DBPs and promoting 401ks, the average balance in a 401k pension in America today is roughly $18,000; and for those over 55 only $50,000. Once numbering in the hundreds of thousands, defined benefit plans are now barely 20,000 and the majority of those in a condition of growing financial stress.
Meanwhile, as 401ks were being favored and promoted by government policies and spread throughout industry from the 1980s onward, DBPs were either dropped by companies by the tens of thousands or were raided by management for their surplus funds. From the 1990s on, they were undermined further by management manipulating actuarial assumptions in order to avoid paying required pensions fund contributions by law. After 2000, the corporate drive to eliminate DBPs intensified, adding tactics such as corporations declaring bankruptcy and dumping their pensions on public agencies, converting DBPs to hybrid ‘cash balance plans’, and shifting money from the pension funds to cover employers’ rising health care costs.
A most recent corporate attack on DBPs—public and private—is now underway, designed to eliminate the last vestiges of such plans. The latest corporate tactic is to get government to redefine pension rules, such that pension funds appear to have even greater accounting losses than previously. The outcome is the dismantling of more plans, or the combined slashing of pension benefits and/or raising of employee contributions.
The second ‘leg of the retirement stool’ is social security. After having produced a surplus for a quarter century in the trillions of dollars, government has borrowed every dollar from the social security trust fund in order to offset general US budget deficits over the same period—the latter caused primarily by rising defense spending and the Bush tax cuts since 2001. Chronic and deep recessions of the last decade have further undermined the contributions to social security retirement benefits. Having failed to privatize social security in 2005 under G.W. Bush, the focus today is to attack it at its weakest point: the social security disability benefits program which provides early retirement benefits to the disabled. The Obama administration in 2011 has also joined in recently in the effort to undermine social security, pledging in the summer of 2011 to reduce social security benefits by $600 billion as part of a ‘grand bargain’ to cut the federal budget deficit, while simultaneously taking what’s left of the annual social security surplus and distributing it back in the form of payroll tax cuts amounting to more than $224 billion in just the past two years.
The third ‘leg of the retirement system’ in the post-1945 period was envisioned to be personal savings. But like defined benefit pensions and social security, it too has been crumbling. After three decades of stagnation in real weekly earnings for the bottom 80% households, the personal savings rate and levels have fallen progressively from the 15%-20% levels in the 1970s to the 3%-4% range today.
In short, all three ‘legs’ of the retirement stool envisioned in the post-1945 period are now virtually broken or shattered. Defined benefit pensions have been eviscerated by 401ks that provide virtually no retirement, and have been undermined by various measures for decades, and are now under the most intensive further attack across the board. Social Security Trust Fund’s surplus meanwhile is being whittled away, as politicians of both parties compete for who can cut benefits the most after the 2012 upcoming national elections. And personal savings simultaneously continue to decline, as job growth lags, wages stagnate, and real income declines.
The collapse of the retirement system in America means not only severe hardship continuing, and coming, for tens of millions, but also the elimination of a critical income growth base necessary to sustain consumption and therefore economic growth. It has meant the bottom 80% households having to turn toward more debt to maintain standards of living, to working longer hours and more part time jobs, to a greater reliance on credit cards, and ever more dis-saving and spending down of past savings to maintain an increasing precarious standard of living.
A basic overhaul of the entire retirement system in America is a precondition for future economic stability and growth. That means not cutting benefits and thus disposable income further. But instead an increase in social security retirement benefits, a return of the trillions of dollars ‘borrowed’ by the federal government from the Social Security Trust Fund, an increase in the payroll tax for social security paid by those not contributing their fair share to the program, a halt to cuts in payroll taxes, a nationalization of all 401k plans under social security, a business value added tax to fund future contributions to a national 401k pool, and policies to restore defined benefit pensions once again.