Retirement income at risk

In my last blog post I wrote about how the current economic problems are not good news for baby boomers, in particular. Rising asset values during the expansionary years of the '80s and '90s fostered the impression that the equity in their 401(k)'s would fund an affluent retirement, but what many are now discovering is the ramifications of this country's shift from "defined-benefit" to "defined-contribution" pension plans.

A reliable stream of income from a pension used to be a common benefit. Over the last thirty years private companies have induced employees to rely, instead, on personal asset reserves as the basis of retirement income. In doing so, corporations have been relieved of the obligation of funding institutional asset pools to cover pensions. One problem with this (among many) is that the majority of individuals don't have enough of a background in the esoterics of finance to know just how much needs to be saved for retirement or how to best allocate savings among alternative investments.

We've heard that many baby boomers have not saved enough. The consequences of their negligence or miscalculation remained masked as long as the economy was buoyant during the years of strong economic growth (1982-2007, during which period 401(k) valuations appeared to be robust). Now there is growing anxiety about the failure of nest eggs to meet expectations.

For most of human history those who lived past their productive years were sustained within a social context of extended family and local community support. As that mode of life faded in the modern era, a variety of alternative ways to provide retirement income were formulated. Countries with a strong collectivist-social-welfare ethos implemented programs based on a paradigm of national-scale, government-guaranteed provision. Alternatively, in those countries where an individualist ethos has predominated (such as the United States), private sector provision of health and pension benefits was the norm.

The conventional wisdom in America used to be that large corporations provided much more than a paycheck. In fact, a "lifer" at mid-century AT&T, IBM, GM, or GE, in addition to material benefits like healthcare, pension, bonuses, training, and tuition reimbursement, enjoyed social benefits like company-sponsored gatherings, picnics, sports teams, and clubs. Workers were fully aware of the bottom-line priorities of the corporations -- and therefore understood the significance of union representation as an important countervailing force -- but they nonetheless viewed the company as a vital life support institution in a wide-ranging sense. The massive pension pools of the large corporations reliably yielded a defined-benefit stream of payments in retirement for employees. The funding of those old-style pension plans was characterized by: (a) set percentage contributions by employees and employers; (b) professional management; (c) guarantees that were felt to be rock-solid.

Facing accelerating global competition in recent decades, American corporations have rushed to shed or reduce such "burdensome liabilities." What the 401(k) phenomenon in America represents is the increasing prevalence of atomized individualism (to a degree Europeans view as excessive). Americans now have to fend for themselves in areas of life where Europeans get (and prior generations of Americans used to get) extensive support from communitarian, corporate, or governmental institutions.

This is highly problematic when it comes to the self-funding of retirement. Making investment decisions upon which old-age security depends is a daunting task even for professionals. It is imprudent to expect harried individuals to master the intricacies of the financial markets. Yet the shift from "defined-benefit" to "defined-contribution" points exactly in that direction. It's a problem that will become increasingly apparent as the long wave of economic contraction we are facing continues to unfold over the next decade.