American Retirement Model – Private Savings

American Retirement Model – Private Savings

Traditional Defined Benefit plans now cover only about one fourth to one third of US workers. However, significant numbers of workers are eligible for Defined Contribution plans in one of several forms. Most workers are also eligible for some form of Social Security benefits once their reach their normal retirement age. What is missing is the former third leg of the Three Legged Stool i.e., Private Savings. The concept was that workers relied on a combination of Private Pension, Social Security, and Private Savings to provide income during their post-employment years. However, since the late 1980’s, Traditional Defined Benefit plans have steadily been replaced by Defined Contribution plans. Combined with stagnate to very low real wage growth, many Americans lacked the disposal income to both participant in Defined Contribution plans and fund Private Savings. Thus Americans, as a whole, have saved significantly less than their foreign cohorts have. The result is not many Americans will have a substantially lowered standard of living during their retirement years.

At the same time that Traditional Defined Benefit plans were being replaced with Defined Contribution plans Americans became increasingly more mobile in their employment. This was due to employees switchinmg employers as well as workforce reductions, company mergers, failures, downturns, and changes in the make-up of the industrial base and workforce of the American econonmy. None of these actions were conducive to sustained long-term employment capable of supporting savings. Compounding this situation was a lack of real wage growth by most workers.

In reality, most middle-income wage earners are left with a “Two Legged” stool consisting of a Defined Contribution plan and Social Security. The result being that many workers will need to delay retirement for several years or even continue working well past even their delayed retirement age. While working past the normal retirement age for many may be seen as highly desirable and a means of making significant contributions to society, for others will be a matter of necessity. Additionally, it has the potential of continue to “gray” the current workforce and limit upward opportunities for those subrogates awaiting their boss’s retirement. Unfortunately, as the recent recession has shown, sometimes an employee’s willingness or desire to remain in the workforce is overshadowed by the employer’s desire to reduce that same workforce.

While early retirement might sound attractive, many of those early retirees are accepting reduced benefits in the form of lowered Social Security benefits and early withdrawals from there, Defined Contribution plans. Even for those who planned and saved well, early withdrawal of monies by several years could change how long the remaining funds will last. Faced with an economy that may not recover for several years, many workers may not have any choice but to accept early retirement, under-employment, and a lowered lifestyle.