Term Paper on "Retirement Portability"

Term Paper 76 pages (20119 words) Sources: 0

[EXCERPT] . . . .

Retirement portability is a hot topic globally; as the economy forces job-hopping work life habits on more and more workers, it is necessary to be able to accrue funds for retirement; under traditional pension plans, retirement funding was lost when workers changed companies. The advent of the 402(k) changed that for companies that offered the plans; however, it also pushed more of the burden of retirement planning and preparation onto the wage earner. For low-wage earners, this was difficult because they often had nothing to put aside. The problem of portability is not unique to the United States, and it is likely there are lessons to be learned concerning achieving fairness, adequacy and efficiency in pensions, based on mandatory, universal, portable plans.

Introduction

Establish a system like Bush's proposed system

Savings transformation

Institute a "means test"

Raise the age for receiving full benefits.

Establish a system like Bush's proposed system

Other countries do it

Statement of the Problem

Definitions

Literature review

General studies incorporating portability issues

Studies generally limited to portability issues

Studies of foreign pension situations

Results

Discussion

Appendix a: The Retirement Account Portability (RAP) Act of 1998

Appendix B: Labor Force Statistics

Appendix C: Pension systems abroad; Snapshots

Works Cited

Introduction

It seems almost ludicrous to discuss retirement portability in the current climate, with the chief executive of the United States attempting to force retirees into a position they had not suffered since before the Great Depression. At the tail end of that era, Social Security was established "to protect the elderly from indigence late in life-to prevent a 'poverty-ridden old age,' in the words of Franklin D. Roosevelt" (Peterson, 1996). In fact, many people still view it as an essential piece of legislation, and arguably legislation that symbolizes the humanitarian nature of the United States. In a pre-buttal to George W. Bush's 2005 State of the Union address, House Democratic Leader Nancy Pelosi said, "Social Security is the most visionary example of what President Franklin Roosevelt called 'bold, persistent experimentation.' Its goal was to ensure that the prospect of retirement was not met with the specter of poverty" (Pelosi, 2005).

Since its inception, however, Social Security has increasingly come to provide benefits for far more Americans than originally intended. But it also pays benefits to middle-class and affluent Americans "many of whom can live well enough without these benefits" (Peterson, 1996); this is becoming a bone of contention that has an impact on private pensions and pension portability. Both, the critics contend, pander to those who don't need the help.

If Social Security benefits were to be slashed as is currently under discussion, at least by the Bush Administration, it would deprive many Americans of the chance to plan for their retirement future; "Among Social Security recipients whose incomes are under $20,000, Social Security accounts for more than half of the total" (Peterson, 1996). Moreover, it would force millions of others into a Demographic Depression, as the safety net originally constructed to protect the lower-income elderly from devastation and, literally, the Poor House (Peterson, 1996). For this constituency, arguably, retirement portability is not an issue; the ability to retire at all is much more cogent.

In fact, the problem of retirement income is serious indeed. The first wave of Baby Boomers will begin to retire in 2008; at that time, they will stop paying into Social Security, and as they do, those paying the freight for the current recipients (Social Security is a 'we pay as they go' plan) will drop from 3.3 payers to each recipient to 2 to one by 2030.

Even by 2018, Social Security won't collect enough to cover annual benefits. "By 2042, money pledged to the program's trust funds will run out completely, according to a Social Security trustee report published in March" (Rafter, 2004).

Logically, then, private pension plans and funds will have to take up the slack, and that is one of the messages in President Bush's push to privatize retirement income funding. However, "A record 35 million Americans and their families are covered by defined-benefit pensions...(and)... despite stock prices that have rebounded from 2000 lows, many plans remain underfunded" (Rafter, 2004). Portability of nothing is still nothing; it would seem any discussion of portability of retirement plans is necessarily limited in scope to a relatively wealthy segment of the population.

In any case, Americans who do have private pension plans through their employers are finding those benefits slipping away. In August, 2004, United Airlines announced that it would probably end its pension plan as part of a bankruptcy restructuring; that, in turn, puts pressure on the Pension Benefit Guaranty Corp., "the government agency that insures pensions for 44 million U.S. workers" (Rafter, 2004). (N.B.: The number of Americans whose pensions are guaranteed is approximately the same as the number of Americans who lack health insurance. It is highly unlikely those who lack health insurance make up any significant part -- if any at all -- of the pool of Americans with threatened pensions.)

In any case, corporate America has preceded the President in pushing down the burden of pension risk onto American workers, and the advent of the 401(k) was doubtless helpful in accomplishing that goal. Companies are now more often offering "more portable defined-contribution plans" than the defined-benefit plans that are much more difficult to translate across various corporate structures. Aside from pushing down the risk, as Rafter (2004) notes, "Some (companies) are dropping pensions altogether." That is not surprising, and might be considered another aspect of ERISA (Employee Retirement Income Security Act), which an old joke noted was for the benefit of the company's owner, and the owner's accountant...right up until he fired the accountant. It was also known as the Lawyers' and Accountants' Full Employment Act, so difficult was it to administer when it first appeared.

Today there are, in addition, more than 70 million Americans who don't have to worry about these things, because they don't have access to any sort of "tax-subsidized payroll-deduction saving plan, and therefore tend to save very little for retirement. As a result, fewer than 60% of today's workers aged forty-seven to sixty-four are likely to receive benefits equal to even half their pre-retirement income when they stop working" (Geisel, 2004).

In 1996, Peterson noted that private-sector pension coverage had been flat since the early 1970s, about the time the 401(k) was being born. He thought that it stemmed "from long-term changes in the workforce and in the nature of work-part-time work, working at home, multiple careers," a social phenomenon that has accelerated after a decade and more of downsizings, offshorings and layoffs. "As for Americans lucky enough to have pensions, they will be surprised, if not seriously disappointed, by how little their plans have set aside for them: the typical defined-benefit pension plan for average-earning workers with thirty years of service replaces just one third of pre-retirement earnings -- an amount that is not indexed for inflation" (Peterson, 1996).

This presents more than one sort of problem. Peterson noted in 1996 that Baby Boomers, especially, were in denial about their retirement income. While almost 2/3 believed hey could live where they want and live comfortably in retirement, they were terrified that neither they nor their government was saving enough to make it possible. "Some two thirds confess that they've never even calculated how much they need to save for their retirement, and an amazing 86% acknowledge that 'future retirees will face a personal financial crisis 20 years from now'" (Peterson, 1996). They all know the government has made promises it won't be able to keep. They also say that individuals should be responsible for their own retirement income, a wish that Mr. Bush is trying to make come true, even if the 401(k) has not been able to make much on an inroad to their retirement savings habits.

Nor is the entire problem of the 401(k) dearth the whole picture. Retiring Boomers will need private savings apart from a company pension or Social Security. But market forces will come to bear in this arena. What one household saves in a bank account or mutual fund, another household borrows. "Whenever the stock market or housing prices rise, many households may feel that they're saving enough. But our aggregate personal-savings rate, except for pensions, is now barely positive" (Peterson, 1996). So even those who do have 401(k)s will likely fall short, portability or not.

While 44 million employees enrolled in 401(k)s is a significant number, it is more than counterbalanced by the 70 million who lack them, arguably many of the same people Peterson had in mind. above. In fact, it appears that the concept of retirement portability is one affects primarily the upper class and parts of the middle-class; for the working class (except in some cases where strong unions hold sway, such as UPS) and the working poor, the idea of retirement portability is as meaningless as is portable health insurance for a reported 45 million Americans.

Of course,… READ MORE

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