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ATLANTIC HIGHLANDS HERALD |
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5 O'CLOCK SURPRISE OF RETIREMENT A friend who reads this column sometimes twits me about my fixation on “problems”. He notes that these are good times. Most people are working, raising children and living in reasonable comfort. True, there is the occasional hurricane or war, but they are beyond our control. Our political system staggers along – far from perfect, but still leading the country tolerably well. Old folks are not begging or sweeping the streets (as they do in Russia), and our medical care is the envy of the world. Maybe I should lighten up. I reply that my concentration on problems (instead of “happy stories”) is partly news-driven and partly “generational”. The news-driven part boils down to this fact of journalistic life: “all is well and there are no problems” is not a story. Besides, it would be disingenuous. There are problems, and not all of them can be ignored indefinitely. For instance, four years ago terrorists destroyed two great commercial buildings, damaged our military headquarters, and killed 3,000 Americans. We can ignore those events, or pretend they are of less consequence than tapping telephone calls from foreigners, sans warrant, but this won’t make the serious problem of terrorism less serious or cause it to disappear. Problems have an annoying way of worsening if they are ignored. As to the “generational” factor, attitudes toward problems map to age in roughly this sequence: angry, distracted, worried, alarmed, resigned. Typically, young people are angered when they first learn of problems, but their response is idealistic. They really believe they can effect solutions by marching, conducting teach-ins (and love-ins), carrying signs and occupying campus buildings. From about age 25 to 50, people become distracted by work, finances, health, and family. After age 50 they become worried and increasingly alarmed about problems. Eventually, as old age sets in, they become resigned – either to their own powerlessness or to a problem’s fundamental insolubility. (An alternate life-progression of attitudes runs: ignorant, worried, alarmed, resigned.) My friend belongs to the “distracted” age group. Occupied with his work and his growing family, he is doing well and sees no problems likely to affect his life – none, at least, that requires much attention or concern at the moment. My concentration on problems he can’t even recognize is symbolic of our difference in age. I mention all this because some problems are in the pipeline that will affect people my friend’s age (40s) and younger. They just don’t know it yet. Maybe the biggest of these is retirement. Even people who think they have it under control might be in for a surprise. My good friend Jack was a pilot for twenty-five years with a major airline. He learned to fly in the Air Force, during the Vietnam War. After his military service he was hired by an airline and had a fine career. He was very proud that he never hurt anyone or damaged the airline’s property. Obviously, this was a great job. Pilots earned high salaries, so the good times rolled for Jack and his family. The pilots’ union had negotiated an excellent pension plan, too. Jack planned to keep flying until the mandatory pilots’ retirement age of 60, but then came the fateful events of September 11, 2001. By 2004, the airline was in deep financial trouble and there were ominous rumblings about changes in the pension plan. Jack figured it was a good time to take his winnings and get out. He retired with a monthly pension, but took half in cash. Added to what Jack had saved over the years, the lump sum produced a good income. Jack was all set for the future. In 2005, however, the airline declared bankruptcy and threw all its pension commitments over the fence to the federal Pension Benefit Guaranty Corporation. The PBGC was formed by the Congress in the 1980s to ensure that people would not lose their pensions if the company they worked for failed. When a company files for bankruptcy, it can unload its pension obligations by transferring all of its pension assets to the PBGC which currently pays benefits to a million people from 3,479 terminated plans. It receives no federal funding. Because of the PBGC, Jack will get some of his pension, but far less than he expected. There is a cap on what the PBGC will pay to anyone, regardless of what was promised. This is bad enough for Jack, but worse news might be coming. Under Chapter 11 bankruptcy law, a pension plan’s assets can include lump sums disbursed to retirees during the last three years. Thus, Jack’s lump sum could be recalled. That money would simply disappear, and Jack’s retirement income would end up being about ¼ of what he expected. A neighbor told him, “You should have planned better.” Jack says, “I know I should have seen 9-11 coming. It’s all my fault…” With or without the irony, Jack’s situation is not unheard of. Millions of workers could face uncertain pension futures in the years ahead. One problem Jack’s airline and other companies have with pensions has to do with quantifying and funding. “Quantifying” a pension means calculating the benefit an employee would get at retirement age if his service with the company ended now. Accountants know how much an annuity will cost to pay that benefit, and how much must be set aside now to buy the annuity when the employee retires. Current laws about funding those quantified pension costs are more stringent today than formerly. In the past, pensions could be merely promised in the expectation that a company would be able to meet the obligation out of current revenues when payment came due. Some big pensions were negotiated by unions during high-profit years, but no one was keeping score. If the business did not expand, those big promises became a big problem. This is why pensions are squeezing many companies today, and why some workers are facing unpleasant surprises at retirement. Pension under-funding is not unique to business, however. The Social Security has operated this way since 1935. Benefits have never been linked by a consistent, uniform formula to the taxes a worker and his employer paid into the system during his working lifetime. Congress reserved to itself the determination of what those benefits should be, without much concern for how much they would cost. Laws requiring businesses to fund pensions fully did not apply to Social Security. Millions of workers have retired on Social Security pensions all out of proportion to the taxes they paid. But with many more workers paying FICA taxes than retirees drawing benefits, the fundamental unsoundness of the system remained hidden for many years. In 1950, sixteen workers paid Social Security taxes for every retiree drawing benefits. Today, there are three workers for every retiree. By 2020, that ratio will be 2:1. If no changes are made to the system, annual benefits will exceed annual taxes by 2018. The shortfall will have to be made up with funds from the Social Security Trust Fund. (The SSTF consists only of Treasury notes which will have to be redeemed to produce the needed monies.) By around 2041, the SSTF will be empty, and the system will be unable to meet its obligations fully without additional funding. Last year President Bush made the first serious attempt in Social Security’s 70-year history to put this New Deal relic on a partially pre-funded footing for future retirees. He proposed that workers under age 55 should have the option of putting part of their FICA taxes into Personal Savings Accounts. Such workers would forego a portion of the Social Security benefits they might have expected. At retirement, they would draw PSA funds to replace the missing pension. This would actually enable a better retirement income than the present system provides. Moreover, the PSA would belong entirely to the worker. At his death, any residual funds would be part of his estate. Besides these personal benefits, the PSA plan would begin to reduce the unfunded liability of Social Security. Eventual conversion to an entirely pre-funded system would eliminate the liability entirely. This will take decades, but it has taken us seventy years to get into today’s mess. For two months the president tried hard to sell his concept at “town hall” sessions around the country. No doubt he expected younger people to embrace his idea in large numbers, since they have the most to lose under the current system. But most of them seemed to shrug and say, “whatever.” Meanwhile, retirees’ organizations like the AARP mounted a furious campaign to trash the president’s idea. Hammered by adversarial media, it gathered little support, causing the Congress to avoid it. Finally, Mr. Bush gave up the fight. Mr. Bush was right about twenty- and thirty-somethings having the most to gain from the new idea (and the most to lose from the current system). But he miscalculated their response. The reason they didn’t rally to his proposal is simple: they are in the “distracted” age group. Their minds are on finding mates, building careers, raising families, and paying for all of the above. Most haven’t even begun to think about retirement. It seems ages away. Like my young friend, they assume all will work out when the time comes. They will think about it (much) later. One pundit said watching Social Security play out is like watching a train wreck in slow-motion: you know what’s going to happen, but you can’t stop it. Baby Boomers – who are used to getting what they want, because of their great numbers – will expect the good times to roll on when they retire. (As soon as 2008 for some.) Instead, many will get a 5 o’clock surprise. If they’re lucky, it won’t be as bad as Jack’s surprise, but Social Security’s poor return will be shocking enough. They’ll find out they’ve been had, and it will be too late to do anything about it. If that doesn’t wake up the next generation – who still can do something about it – nothing will. ***** In a later column we’ll look at the health insurance and the health-care time bomb.
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