401K, Pension or Social Security? The Lack of Retirement Plans

If you're over 30 and haven't started retirement planning yet, you'd better get busy. And don't think you can count on Social Security either. As it stands, the overburdened system isn't enough for most Americans, and benefit cuts are likely coming in the near future. According to the Congressional Budget Office, the total Federal Budget for 2006 is $2.7 trillion, and and 52% of it - or $1.4 trillion - is going to Social Security and Medicare. That has to change. With the Baby Boomers poised to start retiring in mass over the next few years, many are in for an ugly reality check and some very sobering revelations.

For example, in the past couple of decades the retirement income of most Americans has shifted from defined benefit pensions to 410(k) type programs.

In recent years, blue chip companies like IBM, Verizon, Sears, Hewlett Packard, and NCR have frozen or abandoned their pension plans in favor of 401(k) plans in order to save money. Lifetime pensions were costing companies about 6%-8% of payroll, but the switch to the 410(k) cost about half that. And even better for those companies, not every employee participates.

When they were written into the tax code in 1978, 401(k) plans were originally designed as corporate tax shelters for executives at Kodak and Xerox. When they became more widely used by corporations as a cheaper alternative to pensions in 1981, they were only meant to supplement existing pension plans. But for many people today, the 401(k) is the sole retirement plan, aside from Social Security.

Most Americans only have 3 years of salary saved at the time of retirement, which experts contend will last just 7-8 years. But most people are living about 17 years beyond retirement. With that in mind, it's recommended that people set aside 8 years worth of pre-retirement income, or about 14%-18% of annual earnings for thirty years, to be prepared for retirement. But right now the average American family has a $29K retirement account balance. That won't get them far.

Unfortunately, half of America is not covered by any retirement plan, and just 40% are involved in some kind of 401(k) plan. About 25%-30% of eligible people do not join a 401(k) plan, and less than 10% contribute the maximum amount to their plan. Thinking of more immediate needs, half of all people who change jobs take their money out of their 401(k).

The burden for retirement planning has shifted to employees in recent decades. According to the Labor Department, in 1974 workers contributed 11% to their retirement plan while employers contributed 89%. But by 2000, that burden had shifted largely to employees who were contributing 51%, while employers contributed 49% to retirement plans.

How will the shift away from pensions to 401(k) type programs affect most people? The following is quite illustrative.

For 40 years, Nebraska offered state employees the options of a defined benefit pension plan or a 401(k) plan. Both were top-notch plans with mandatory participation and contribution levels, and a 7% employer match. And after 40 years their research showed that those who had chosen the 401(k) did not have adequate or sufficient savings for retirement. So Nebraska dropped its 401(k) plan entirely.

Many experts think the country could be facing a crisis in the near future as Baby Boomers seek to retire and find that they can't afford to do so. They say the new reality may be working for life, and not retiring at all.

Copyright © 2006 Sean M. Kennedy. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the author's consent.