Earlier today, while I was browsing through the MINT8 retirement report, I noticed something I had missed on earlier reads: estimates of the number of workers with pensions.
As we all know, the era of the traditional "defined benefit" pension is pretty much over except for government workers. These are pensions that had a defined payout when you retired, and they've mostly been replaced by "defined contribution" plans like 401(k) accounts. The value of these plans depends on how your investments do, so the payout isn't guaranteed.
MINT8 has projections for pension plan participation, and this is what it looks like for the upper middle class:
As you can see, DB plans are down and projected to keep going down, while DC plans have gone up. However, between the two of them pension plan participation is extremely stable: 87% a few years ago and 85% half a century from now.
However, the news is not so rosy for the working class:
Among workers with modest incomes, DB plans are down but DC plans haven't made up for them. A few years ago 55% of these workers had pensions of some sort, while half a century from now that's projected to fall to 44%.
Loss of unions, loss of defined benefits. It should be noted, some government workers get retirement benefits in lieu of social security. They are not required to pay in, but then do not get any benefit--so they better move on quickly or stay until vested.
Outsourcing jobs and "independent contractors" are another way companies can limit benefits. The official company's employees can have great benefits--but the others, not so much--even if they are doing the same jobs and working in the same buildings.
It should be noted, some government workers get retirement benefits in lieu of social security. They are not required to pay in, but then do not get any benefit--so they better move on quickly or stay until vested.
While true, this is not the case for federal employees hired after like 1983 (which is to say by now the vast majority of them) and is not the case in most states for state and local government employees. This view appears to be most common in California, which does have a lot of carveouts for its state/local government employees, but most states have a Section 218 agreement with SSA to cover most/all of their state and local government employees.
thanks
A 401(k), even with company match, is NOT a pension and should not be lumped in with them. It is personal savings, and should only be considered such.
The classic three-legged stool for retirement was Social Security, pensions, and personal savings. To lump 401(k)s in with pension is to give corporate America cover for abandoning their obligation to workers.
Yes. That green line should be labeled any qualified plan or any retirement account.
The Boomers don't care about the distinction between defined benefit and defined contribution plans, which is why Kevin glosses over it every time. (Well, to be more accurate, they do care a lot when the distinction affects their own employer shifting them from DB to DC, but as long as the problem falls on someone else it's less of a concern to them. See also: housing prices, college costs, wage stagnation, etc.)
This is anecdata but it is a minority of my Boomer peers who have a pension. I certainly don't and I did not even have a 401K until I was in my 40's. Boomer bashing is just not fruitful. All those Tech Bros are not Boomers and many of the oligarchic conservative billionaires ae not either. . I think generational blame games put the focus on the wrong things.
Exactly true.
And a darker truth is that a lot of lower wage workers are worse off for having 401(k) plans. They withdraw the money as soon as they are able to -- it making a material difference in their current standard of living -- and pay the 10% penalty on top of regular income taxes when they do.
In my opinion as a retired pension actuary, we would do better to eliminate all tax advantages for private pensions and tax advantaged savings/retirement plans and roll the additional tax revenues into a much broader Social Security program.
That will never, ever happen as millions of middle class folks would get hit hard by the tax burden, especially if it's not accompanied by a closing of the tax loopholes that allow hedge fund types to pay little in taxes.
And it would be the biggest stock market crash in history.
I know Kevin meant 'upper third of the middle class' when he wrote 'upper middle class' -- but that's a misleading way to put it. The term 'upper middle class' usually connotes a more rarified group -- think highly educated and compensated professionals. Wikapedia says "Most people in the upper-middle class strata are highly educated white collar professionals such as physicians, dentists, lawyers, accountants, engineers, military officers, economists, urban planners, university professors, architects, stockbrokers, psychologists, scientists, actuaries, optometrists, physical therapists, pharmacists, veterinarians, high-level civil servants and the intelligentsia. Other common professions include corporate executives and CEOs, and successful business owners. Generally, people in these professions have an advanced post-secondary education and a comfortable standard of living.[1]". "Sociologists Dennis Gilbert, Willam Thompson and Joseph Hickey estimate the upper middle class to constitute roughly 15% of the population."
They may need to create a new category for highly-educated, poorly-compensated professionals: adjunct professors, librarians, etc. They typically have access to employer-based retirememt accounts, but a 15% contribution plus the employer match is very little in actual dollars.
Schoolteachers would be the most numerous class falling into this category, I think. Pension schemes for teachers vary from state to state. In the blue state where I live ( its schools rate in the top 10 consistently worldwide), teachers still don't get very generous pensions, especially if they enter teaching as a second career, as I did. Teacher starting salaries are notoriously low; the big draws for teachers are the time off, the security and a secure pension. Teachers who sock away money in 403 (b) accounts save on taxes and make a nest egg to go with the pension. But since in many states the defined benefit is deferred payment (in my state, 11% of salary is withheld for it), some teachers may need the money for their families, especially in the early years.
Right now, the pool of prospective teachers is shrinking rapidly; fewer college students are majoring in education, and in many places there are severe shortages of teachers. I think many folks are jealous of teachers for the time off and the benefits, and think the salaries are too high, since they generally make up 1/2 the budget of any given school district, but I still think that the pensions need to be more generous for most teachers in most places, both to attract new teachers and to encourage older ones to seek new opportunities outside of the classroom
That's not misleading at all. If you're in the upper third of the middle class, you are upper-middle-class regardless of if you have a doctorate or are a high school dropout.
Starting in 2025 companies will be required to automatically enroll employees in their 401k with an annual contribution of at least 3% and an annual increase of 1%. Employees can opt out, of course, but I think this will go a long way for boosting retirement savings for people that are making less. It's easier to sock away that money if it was never part of your take home pay in the first place. A lot of companies (including my own) have already been doing this for years.
Starting in 2025 companies will be required to automatically enroll employees in their 401k with an annual contribution of at least 3% and an annual increase of 1%. Employees can opt out, of course, but I think this will go a long way for boosting retirement savings for people that are making less.
I've never heard of this, but let's assume it's true.
Lots of people will simply opt out if this goes into effect. It might not be the majority - lots of people are also lazy when it comes to paperwork - but it certainly will be noticeable if the change happens without being accompanied by a raise in pay, decrease in medical premiums, or the like at the same time. I notice every time my paycheck changes. And for people literally living paycheck-to-paycheck, I can't imagine them prioritizing future retirement needs over being able to pay the electric bill or whatever this month.
It's not going to ensure a cushy retirement for everyone. I just meant the average savings and number of people that contribute will increase. Like you said, people can always opt out. But they also have to ownership of their retirement plans and not rely on someone else to take care of you.
Yes, it's in the SECURE 2.0 act, which passed at the end of December.
Many companies have already been auto-enrolling people for years. I was hired at a company in 2001 that auto-enrolled
employees over the age of 30 and then auto-increased contributions yearly until they hit 10%.
Because it's not actually a new idea, we do have data on what happens in the companies that have already tried it out. The big 401k providers have looked at how many people remain enrolled. Fidelity found that 91% remained, while Vanguard had 93%.
Here is an example article: https://www.google.com/amp/s/www.cnbc.com/amp/2022/12/03/men-participate-less-in-401k-plans-than-women-unless-auto-enrolled.html
401ks aren't pensions. They shouldn't be called pensions. They are not the equivalent of pensions, and should not be treated as such.
Hell's bells, they aren't even tax-free!
The Boomers don't care about the distinction between defined benefit and defined contribution plans, which is why they were happy to impose them everywhere as soon as they gained power in the corporate world to do so and is why Kevin glosses over the distinction every time. (Well, to be more accurate, they *do care a lot* when it's their own employer shifting them from DB to DC. But as long as the problem falls on someone else, it's less of a concern to them. See also: rising housing prices, rising college costs, rising medical costs, wage stagnation, etc.)
Who the hell has a pension??
My wife does. She's a teacher in Florida. They have a couple months to choose between the pension or the investment plan (basically like a 401k). Then they can change it one time during their career. We decided it was good for her to do the pension to balance it with my 401k and other investment-based qualified plans.
Government employees. And unionized workers in private corporations. Generally, anybody unionized still gets a pension, so if you don't know anybody with one, it's because deunionization has taken over your part of the country.
I think the median amount in a 401k is around $35K, so that's not even much for savings. Even if it's twice that, it's not much to retire on.
As far as pensions go, yes I have one but it was frozen 10 years before I left the company. Even before that they had been tweaking the rules to make it pay less. Then they cheat you on the calculations. The upshot is that my pension is about a third of what I would have expected when I started with the company.
At that, I'm better off than the younger fellows. Some of them are entitled to draw pensions of $5k or so a year when they get to be 65. Should this really count as a pension?
I think using the same vertical scale would have made the contrast between upper middle class and working clearer without sacrificing much in terms of the distinction between defined benefit/contribution.
Back in the 80's when 401k's came out they were intended to be a bridge between when you were given an early retirement and 65 years of age then your pension would kick in. At least in the corporate suites at the time that was the thinking as layoffs were becoming popular especially among the older workers. At least the 401k would cushion the blow for a few years.
Social Security was meant to keep the elderly from falling into poverty. Now it's treated as their retirement plan.
As richer people make their money from investments, and they are not subject to FICA taxes, then the FICA tax base shrinks relative to GDP.