MONEY MATTERS: Will You Have Enough To Retire?

Last month, the Commerce Department reported that the nation’s personal savings rate for 2006 was negative 1 percent, the worst showing since the Great Depression. Simply put, this means that people are spending more money than they take home after taxes.

Yet things are set to get worse.

Starting next year, the savings rate will be driven down further as Baby Boomers begin retiring and drawing on their retirement savings. That means the nation will need greater savings to fund the onslaught.

The report about the savings rate is particularly bad news right now because, coupled with other developments, the retirement future of the average American doesn't look pleasant. For anyone who thought they could rely on a corporate pension, think again.

Corporate pensions appear to going the way of cassette players and rotary phones. IBM opted out last year, telling employees that their pension benefits will be frozen in 2008. And they aren't alone; lots of reasonably healthy companies -- Verizon, NCR, Lockheed Martin, Hewlett-Packard, and Motorola, to name a few –- had already done the same. It won't be long before most other American corporations follow suit and relieve themselves from their pension burdens. There's been widespread speculation that GM could be next.

As it stands, there have been a few dramatic cases of companies going bankrupt and defaulting on existing pension commitments, such as United Airlines. The problem's gotten tons of press, but that won't change a thing. It's a trend that's been underway for many years.

Defined-benefit pension plans, under which workers receive fixed monthly benefits based on their salaries and tenure, declined from 95,000 in 1980 to 30,000 in 2004 as companies either stopped offering plans or switched to 401(k)-type programs.

For the last two decades, more and more corporations have shifted to 401(k)s that automatically set contribution percentages and investment choices for employees. Under the guidance of investment professionals (who aren't employed by for-profit mutual fund companies or brokerage firms), employees can determine how much money to set aside and how to invest it.

But while 401(k)s may be fine for younger workers, they don't work for older workers nearing retirement.

That said, we are entering a period in which workers and corporations will battle over the demise of pensions, long the primary source of retirement income for many Americans. But the fight will also involve governments at all levels, regulators, accountants and taxpayers. And these battles will be heated because everyone involved has so much to lose.

The primary problem is an aging population that is living ever longer. Pension costs have sky rocketed due to millions of longer-living retirees, and the problem will only worsen in coming years.

In 1950, when pensions first became common, American life expectancy was just 68, but it has now grown by an additional ten years. Meanwhile, American workers, many of whom are union members, are watching as employers dump or cut their pensions at a time when there's reasonable concern about the future of Social Security. For these workers, retirement security is non-negotiable.

But the pension problem is even worse than most American realize.

Public-employee pensions have never been accounted for like those run by private employers. Governments aren't required to reveal their pension liabilities the way a corporation is, on the theory that governments can simply raise taxes to pay retirees.

But the Governmental Accounting Standards Board, which sets the rules for the public sector, has finally decided to change its regulations. State and local governments will now have to reveal their pension liabilities, which may be underfunded by $1 trillion or more. Gulp.

And the private sector has a mess on its hands as well. Its pension funds are underfunded by $350 billion. Right now, 44 million Americans are relying on these private pensions, and they have reason for genuine concern.

The Pension Benefit Guaranty Corporation, which insures the defined-benefit plans for all those people and takes over the plans of bankrupt companies, reported a deficit of $18.1 billion at the end of the 2006 fiscal year. It was the fifth consecutive year that a shortfall had been reported. And the PGBC predicted that its troubles would continue well into the future.

Last year, the PBGC had to assume responsibility for an additional 94 terminated pension plans with a total of $600 million in assets and $1.1 billion in future benefit liabilities. The PBGC is now responsible for a total of 1.3 million workers and retirees. As a result, it paid benefits of $4.1 billion last year, up from $3.7 billion in 2005, and is projected pay out $4.8 billion in benefits this year.

When United Airlines and US Airways filed for bankruptcy in 2005, they forced a combined $9.6 billion in pension liabilities onto the PBGC. Delta Airlines and Northwest Airlines, both of which later filed for Chapter 11 bankruptcy protection, could follow suit.

And then there's the greatest pension crisis of all: Social Security. The hard truth has been hidden by the so-called trust fund, in which the plan's annual surpluses are invested until future need. But since those surpluses are required to be invested in government bonds, they've simply been handed over to the U.S. Treasury and spent by Congress.

The trust fund is a myth. When Social Security's annual surpluses are exhausted in the next decade, there will be a panicked struggle over how to cover the plan's obligations. And the inconvenient truth about pensions has also remained undisclosed for decades. Next year, when the first baby-boomers turn 62 and become eligible for retirement, that reality will finally have to be confronted -- and it will get ugly.

Many financial experts see pensions as an inherently unstable, unfair and economically unrealistic means of providing for retirement.

Though they've existed since the 19th century, the corporate pension became a retirement staple in the United States following World War II. But American corporations didn't foresee pension commitments becoming such a heavy burden for companies dealing with stiff foreign competition and longer living retirees.

Many economists argue that if companies had invested in individual retirement accounts for their employees in previous decades, instead of putting that money into pension plans, they wouldn't be facing this problem. Though IRAs and 410(k)s didn't exist until the 1970's, the general point is true.

The problem with pension plans is that they promise a specific benefit in the future without knowing the affordability of those benefits at that time. In essence, pensions are a contract between current and future generations, much like Social Security. And as with Social Security, those future generations aren't represented at the bargaining table. As a result, they're guaranteeing the retirement income of older Americans with no guarantee of anything in return.

When succeeding generations are smaller than the ones whose retirements they are helping to fund, they face tremendous and unfair burdens. As a result, the Social Security system and American corporations are facing similar difficulties.

Unfortunately, there are millions of Americans with no pension, no 401(k), and no savings to speak of. And without that additional support, few can survive on Social Security alone. The American retirement system is crumbling, and not nearly enough is being done to rectify it.

Sean M. Kennedy, Money Correspondent:

Money Matters, by Gather Correspondent Sean M. Kennedy, is published every Thursday to Gather Essentials: Money.

Money Matters is a practical look at money and how developments in the American economy may affect you.

Sean is a freelance writer based in Los Angeles.

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