New Essay from Professor Hemp (07/14/2005):
The Truth about 401-K's:
How the Federal Gov't has conspired to destroy your pension begining in
1981
Defined
Contribution plans, or 401-K's, began supplanting Defined Benefit plans,
or pensions, beginning in 1981. This following sentence, (part of
the included article that follows), needs to be screamed across America
because it represents a royal "screwing" of the working class:
"Under a
defined-benefit plan, a typical company might pay an average of around
8% of its payroll into a pension account, with individual payouts based
on a retiree's salary and tenure at the firm. But with a 401(k), a
company could pay benefits of anywhere between 3% of payroll, if it
provides a match to employee contributions, to nothing at all. "
See if my
math checks out with yours. The employer lessens his contribution from
8% to 3%. That means he is now contributing 37.5% of what he we
contributing with defined benefit pension plans (3 divided by 8). In
other words, by going to 401-K's, the employer is putting 62.5% less
into your "retirement instrument" than he was previously putting into
your defined benefit pension plan. But that is only if your
employer is matching and you are contributing as much to your 401-K as
the law allows. If you are not contributing, or your employer
hasn't been matching, then the employer is saving 100% of what he used
to contribute, beginning in 1981. . . In other word your employer is
going from a 8% contribution to a 0% contribution.
On top of
that the defined benefit pension plan results in a paycheck until the
day you die . . . so if you have taken care of yourself Methuselah, you
are set until death. But with the 401-K, once the money is gone . . .
into the poor house you go. Better start taking on smoking or lion
wrestling as new hobbies. Instead of being called "defined
contribution plans" these 401-K's should be called "guaranteed poverty
plans."
Pardon my
cynicism but doesn't it bother you that these essential details, about
401-K's, are conveniently absent from every mainstream article regarding
401-K's. And of course Bush's Social Security Privatization scheme
promises to do the same thing to your Social Security: once the money is
gone you are screwed. What is going to happen to baby boomers, and
beyond, if something is not done about this ticking time bomb?
Bruce W.
Cain (AKA Professor Hemp)
Note: The
tables are not formated in the following version. To view the
charts go to the link (above)
The 401(k) Could Prove a History-Making Fiasco
http://www.thestreet.com/funds/belowradar/10016126.html
By K.C. Swanson Staff Reporter
04/08/2002 07:06 AM EDT
It's starting to look like 401(k) plans will go down in history as a
costly failure. In fact, the abandonment of old-fashioned pension plans
is likely to leave many Americans poorer in their old age.
Evidence shows that as 401(k)s have taken hold, employees have lost
ground in their retirement savings -- even during one of the greatest
bull markets in history.
In the last 10 or 15 years, companies have increasingly pushed the
burden of managing pensions onto their workers. During the market's boom
years, workers rarely complained. Indeed, few regretted the
disappearance of defined-benefit plans in an era in which 401(k) plans
offered access to double-digit stock market gains.
Now it's clear that many employees either can't afford to make adequate
contributions or don't understand that they must. In 2001, fewer than 7%
of 401(k) participants contributed the maximum allowed amount to their
plans, according to Cerulli Associates, a fund consulting group.
Moreover, because the average U.S. worker has little training in
financial planning, some have assumed far too much risk, while others
have invested too cautiously -- and both moves damage long-term returns.
Granted, not everyone has lost out with 401(k) plans. Employees with
high incomes, financial know-how and an interest in investments stand to
benefit from a system of self-managed retirement accounts. But few
people fit that profile.
Retirement Savings: Facing a Shortfall
Surprising as it may seem after a decade of prosperity, Americans on the
verge of retirement actually have less money saved now than 15 years
ago. For those aged 47 to 64, inflation-adjusted median retirement
wealth -- including defined-contribution plans, defined-benefit plans
and the value of Social Security benefits -- actually fell by 11%
between 1983 and 1998, according to a study by New York University
economist Edward Wolff.
Yet for the same age group, average retirement wealth rose 4%. In other
words, over the last 15 years, wealthier people gained retirement
wealth, the less affluent lost it.
It's no coincidence that in the meantime, 401(k)s were elbowing out
defined-benefit plans as the retirement plan of choice. By 1998, well
over half of workers close to retirement owned a 401(k).
"401(k)s are good if you can accumulate a lot of money, but medium-wage
workers just haven't accumulated as much. Lower-income workers did much
better under [defined-benefit] plans," says Wolff.
Meet Your New Pay Cut, the 401(k)
Given their unimpressive track record, how did 401(k)s get to be so
popular in the first place? It helped that the plans became widespread
in the '90s, amid a period of double-digit stock market gains. Back
then, 401(k)s were touted as a means to access potential stock market
riches -- unlike defined-benefit plans, with their stodgy guaranteed
payouts.
401(k)s also offered portable benefits, letting workers take their
retirement funds with them if they changed jobs.
But at least as important as their appeal to workers was that 401(k)s
saved employers money. "401(k) plans in general are seen to be cheap
because the company doesn't have to make as large contributions," says
Annika Sunden, associate director for research at Boston College's
Center for Retirement Research.
Under a defined-benefit plan, a typical company might pay an average of
around 8% of its payroll into a pension account, with individual payouts
based on a retiree's salary and tenure at the firm. But with a 401(k), a
company could pay benefits of anywhere between 3% of payroll, if it
provides a match to employee contributions, to nothing at all.
By switching from defined-benefit plans to 401(k)s, companies have
effectively cut worker benefits. But there's little evidence that they
have simultaneously raised wages to offset that effect.
Moreover, in line with the faltering economy, companies have cut the
amount of money they contribute to worker plans. "401(k)'s are
profit-sharing plans. People have forgotten that. When profits decline,
company contributions decline as well," says David Wray, president of
the Profitsharing/401(k) Council of America, an employer trade
association. In a survey of 909 member companies, the council found that
their average contributions to 401(k) plans dropped from 3.3% of payroll
in 1999 to 2.5% in 2000. Contributions declined further in 2001, though
no specific number has been released yet.
The bottom line: Many employees with 401(k)'s aren't saving enough money
to retire. A survey by the Employee Benefit Research Institute found
that among workers aged 40 to 59, 39% reported savings of less than
$50,000. Less than one-fourth have saved $100,000 or more.
Such low totals are not a reflection, however, of declining
contributions. Despite the down market, contributions to 401(k)s
increased 10% from 1999 to 2000, according to Cerulli. The firm projects
that contributions grew another 10.1% in 2001, though the information
hasn't been made official.
But partly because of the down market, the average 401(k) account
balance declined 0.1% in 2001, according to the ICI.
Social Security Won't Pick Up the Slack
Some folks may be betting that Social Security will come to their aid in
retirement. Indeed, almost half of current retirees 60 and older say
Social Security is the biggest share of their income.
But the federal program is not likely to be able to pick up the slack in
the future. Already, payouts are on the decline. In the 15-year period
ending in 1998, the value of Social Security benefits to households with
people aged 47 and over declined 11%. Among the reasons: average hourly
wages have declined in that period, as have the average hours worked.
Also, fewer people are married, and married people reap bigger Social
Security benefits.
Moreover, with the very structure of Social Security up for debate, it
seems risky for younger workers to expect generous benefits when they
reach old age.
As it stands, of course, the tenuous footing of Social Security in the
future has grabbed all the attention. But it's becoming clear that many
Americans also haven't put enough money aside in their private
retirement accounts, the other key component of retirement security.
And unlike the '90s, today there's no soaring stock market to give
anyone reason to think insufficient retirement funds could go the
distance. "I think the stock market hype really clouded this [retirement
savings] issue," says Wolff. "The boom largely benefited the rich, but
it hasn't really filtered down that much."
You also might want to check
out these books for further perspective, or at least check out the
reviews:
The Case Against the Global
Economy: And for a Turn Toward the Local
by Jerry Mander, Edward Goldsmith
http://www.amazon.com/exec/obidos/tg/detail/-/0871568659/ref=pd_rhf_f_1/103-0044256-2449479?v=glance&s=books&no=*&st=*
In the Absence of the Sacred:
The Failure of Technology and the Survival of the Indian Nations
by Jerry Mander
http://www.amazon.com/exec/obidos/tg/detail/-/0871565099/ref=pd_bxgy_text_1/103-0044256-2449479?v=glance&s=books&st=*
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