Young workers' retirement outlook grows bleaker

The Washington PostNovember 10, 2012 

— The economic downturn is pressing more employers to reduce pension benefits and significantly delaying when people launch their careers, darkening the already bleak picture young workers face in saving for retirement.

Corporations have been slashing pensions for decades, but such cuts are common now in the public sector, where retirement benefits were traditionally much better. In both cases, employers frequently reach for the same tool – preserve benefits for current employees but make severe cuts for new ones.

As Washington turns in the coming weeks from the presidential election to the long-term debt issues facing the nation, the discussions will center around whether the country can afford programs such as Social Security and Medicare in their current form.

So far, these debates have focused little on how potential cuts in federal benefits may affect retirement for younger generations who already are seeing employers shrink their safety nets.

The confluence of events is creating a dichotomy in the nation’s workforce and a massive burden for the country that will not be fully evident until the next generation approaches retirement.

“We have a looming retirement income crisis in this country,” said Diane Oakley, executive director of the National Institute on Retirement Security. “The problem is we won’t see the ultimate brunt of it until 30 years down the road when it is too late to do something about it.”

Young workers are having little or no say in any of this, but the changes will affect them most.

Unsteady platform

Financial planners have long compared retirement security to a three-legged stool supported by Social Security, personal savings and employee pensions. But that stool, never sturdy for many Americans, has grown even more unsteady in recent years.

As employers shy away from the financial risk of funding their workers’ retirements, the share of private-sector workers with pensions that pay a guaranteed benefit has been in sharp decline.

Fewer than one in three workers had defined benefit coverage in 2010, down from 44 percent in 1995 and 88 percent in 1983, according to the Center for Retirement Research.

In addition, one-fifth of the workers in private-sector pensions and 10 percent in public-sector plans have had their benefits frozen, meaning their benefits are no longer growing or their plans are no longer accepting enrollees, or both.

The changes already are hitting retirees. Just 42 percent of people 60 and older had income from a traditional pension plan in 2010, down from over half in 2003.

“We expect that number will continue to fall,” Oakley said.

With traditional pensions in decline, workers are being forced to rely more heavily on 401(k) plans and similar retirement savings vehicles. But these have proved inadequate given the erratic investment market returns of the past decade and an income squeeze that has made it difficult for many workers to save.

Harder climb

More recently, rock-bottom interest rates have made it harder to build wealth, a reality that has put added financial pressure on employers who continue to offer traditional pension funds. Those low rates also have forced employers who have kept their defined-benefit pensions intact to dig deeper to fund them to comply with accounting rules.

This is all compounded by the fact that many Americans do not put aside enough money to begin with. The Federal Reserve says that in 2010 the typical household headed by people between ages 55 and 64 had just $120,000 saved in retirement accounts.

Not long ago, many Americans were able to tap their home equity or other savings to cushion their retirements. But the recession wiped away 40 percent of Americans’ wealth, severely crimping that option.

The mounting challenge has left many young workers anxious about their futures and eager for guarantees.

The percentage of workers under 40 who said their retirement program was an important factor in accepting jobs more than doubled between 2009 and 2011, going from 28 percent to 63 percent, according to a survey this year by Towers Watson, a human resources consultant.

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