The Perils of Do-It-Yourself Pension Plans

By Francis, David R. | The Christian Science Monitor, June 16, 2003 | Go to article overview

The Perils of Do-It-Yourself Pension Plans


Francis, David R., The Christian Science Monitor


Planning for retirement is gradually becoming more of a do-it- yourself proposition. As a result, Americans can be less certain of how much they will get when they retire. That does not bode well for those who don't make savvy choices in their retirement plans.

Here's what's happening:

At present, a medium-wage earner who retires at 65 receives Social Security benefits of about $1,000 a month. That replaces about 41 percent of his or her previous earnings.

This so-called "replacement rate" for a medium-earning worker could fall to 30.5 percent for someone retiring in 2030, notes Alicia Munnell, director of Boston College's Center for Retirement Research.

Some of the reasons for this drop: The normal retirement age is being extended gradually to 67; Medicare premiums are being hiked; and, over the years, with inflation and rising wages, more retirees may have more of their Social Security income subject to taxes (but possibly at lower rates). And if Congress cuts benefits to close a perceived financing gap for Social Security, benefits could fall even lower.

The good news is that with gradually rising productivity, Social Security payments could still have more purchasing power than they provide today.

At any one time, half of American workers are covered by a private pension system. That ratio hasn't changed since the 1970s. At retirement, about 60 percent of Americans receive private pension benefits, often modest, in addition to a Social Security check.

Private pensions come in two varieties: Traditional pensions, in which the employer provides a "defined benefit" to the retiring employee. (The number of such plans has been shrinking.) And "defined contribution" pensions, such as 401(k)s for business and 403(b)s for nonprofits. (These have been growing in number.)

Under a defined-benefit plan, the employer takes and manages the investment risk. Because of the weak stock market and low interest rates, that corporate burden worsened in 2002. A study by Wilshire Associates finds that pension assets for firms in the Standard & Poor's 500 index dropped $106 billion to $892 billion in 2002. In the same year, their pension liabilities rose $105 billion to $1.07 trillion. Nearly 9 of 10 plans are underfunded.

Company contributions to their plans almost quadrupled in 2002 to $41 billion from $12 billion in 2001. During the stock-market boom of the 1990s, most plans were overfunded.

Another new study, by FTI Consulting, calculates that of the 354 companies among the S&P 500 with defined-benefit plans, 215 will have to make additional contributions exceeding $36 billion this year to comply with the law. FTI Consulting, of Annapolis, Md., figures these contributions are for most companies "relatively manageable."

Nonetheless, they reduce profits and capital available for company projects.

Business has been pressing Congress to ease the burden by changing the law governing how pension plans calculate their obligations.

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