Richard L. Kaplan has been on the faculty of the College of Law since 1979. His major research interests include health-care financing, pensions and federal tax policy. He developed one of the nation's first law school courses on elder law, a specialty that ties together many of his interests, and serves as faculty adviser for the Elder Law Journal, published by the law school. Business and Law Editor Mark Reutter interviewed him about the future of pensions and retiree benefits.
IBM is the most recent Fortune 500 company to announce that it will end its pension program for employees. How secure are the promised retirement benefits for Baby Boomers, and how secure are retiree benefits for younger employees?
All employer-provided benefits are increasingly insecure as we are in the midst of a major reconsideration of what should employers provide for their employees. Pension benefits are the immediate focus of this reconsideration, but health insurance is just ahead. The pension freeze by IBM showed that even very profitable companies are willing to abrogate decades of pension practices that older employees had long factored into their retirement planning. The bottom line is that pension benefits that have already been earned or are being paid out are fairly secure, but everything else is up for grabs.
Is the trend to freeze or end pensions by corporate America a matter of too few active workers supporting too many retirees, or are other factors at work?
That's certainly one factor, as well as our increasing longevity, which translates into larger pension costs for benefits that are paid out over a recipient's lifetime. More generally, global competition means that companies feel compelled to keep their benefit offerings in line with their competitors wherever they might exist, whether in this country or overseas. Indeed, in making its freeze announcement, IBM specifically noted that most of the newer companies in the high technology industry did not have defined benefit plans.
In place of company-sponsored pensions, many employers are offering 401(k) plans. What is the difference between a defined-benefit pension plan and a 401(k) plan.
A defined-benefit plan is the so-called traditional pension arrangement whereby the employer set aside money and managed the investments to generate a stream of monthly payments to its retirees as long as they lived. How those assets were invested and managed were the sole responsibility of the employer. The retiree simply received a "benefit" that was "defined" in the plan document, which usually based the amount on the person's average salary over some period of time and that person's service with the company. A 401(k) plan, in contrast, provides that an employee can set aside some portion of his or her salary on a pre-tax basis, and this amount is often "matched" by some additional contribution from the employer. The employee designates how these funds are invested. There is no guarantee or even a suggestion about what the payout from this arrangement will be, and employees with identical earnings records could easily end up with very different pension-plan accumulations.
Who benefits more from a 401(k) plan - employee or employer?
Some employees favor the 401(k) arrangement because it gives them control over how their retirement funds are invested and there is no penalty for changing employers after a "vesting period" (usually five years) is satisfied. Long-term employees, however, typically lose the bonus payments that defined benefit plans provide for extended service with an employer.
As for employers, the 401(k) plan is almost always more appealing. Once the employer makes whatever matching contribution it provides, the employer's responsibilities are essentially over. Employers have no risk of investment declines that might require additional pension-plan payments, they need not worry about whether the investments will provide income for the retirees' life, and employers completely avoid any premium payments to the federal agency that insures defined-benefit plans (the Pension Benefit Guaranty Corp.), because there is no such insurance for 401(k) plans. Indeed, Congress is currently in the process of raising the cost of these premiums by 58 percent.
Companies are cutting back their health-care spending for retirees at the same time that health costs are spiraling upward. What are the implications of these cutbacks to families and to government policy?
Almost every retiree affected by these changes loses, because corporate health-care plans are superior to what older individuals can typically obtain on their own outside a group context. Indeed, many workers age 55 and older may be unable to obtain replacement health insurance at any cost due to their medical history. Persons age 65 and over can usually obtain Medicare coverage, but persons younger than 65 are not eligible for this program even if they are completely retired. And because most such persons have too many financial resources to qualify for Medicaid, they may end up medically uninsured, often for the first time in their lives.
How can a working couple best prepare for retirement? Or is the very concept of "the golden years" of financial security becoming more out of reach to the average American?
Retirement for non-wealthy Americans is a relatively recent phenomenon, essentially dating from the enactment of Social Security during the 1930s New Deal of President Franklin D. Roosevelt. Of course, average life expectancy back then was less than 62 years, so the notion of extended time after work was not part of the plan when it was created. Moreover, the focus then was to get older workers out of the workforce so that younger people could be employed. The world today looks very different. We may be reassessing just what retirement can look like and who can realistically anticipate it with financial security.