It’s National Coffee Day. Time for Baby Boomers to wake up and smell the roast prepared for them sixty years ago by their own parents. If they had a dime, they could brew some coffee, and plan their retirement. But alas, the Baby Boom has been the hardest hit in the job market (click here to find out ALL the places the Baby Boom has been whacked), and it is also the hardest hit in the retirement sweepstakes game.
How Baby Boomer s' fathers ensured old age poverty for their kids
Sixty years ago, when the first of the Baby Boomers were tiny tykes, Daddy was busy moving up the ladder at work ― whether a white collar worker who had taken advantage of the GI Bill after the war for a college education, or a blue-collar worker protected by unions.
Fifty years ago, the white collar dads began to notice that they’d earn more in profit sharing and pensions if the company earned more profit, and if the union grunts didn’t demand so much.
Forty years ago, a move against the unions and for the increase of corporate profits took flight in earnest, right as Dad became upper management. The greatest of these maneuvers was ERISA, the Employee Retirement Income Security Act of 1974.
This was a sea-change in retirement funding of major proportions. Dad was already vested in the company retirement plan, so it wouldn’t affect him. Any unions that were still viable could still provide retirement plans as always. But new hires at most companies would forevermore be denied significant participation in their retirement nest-egg by their employers. With ERISA, virtually the entire burden of creating retirement income ― a pension ― was shifted from employers to employees. Companies prospered. New hires, especially Boomers who entered the job market in a down cycle made lower still by their sheer numbers (and they didn’t give birth to themselves!)….not so much.
Congress had nominally passed ERISA in response to the demise of Studebaker and a resulting loss of all or some pensions for more than 4000 employees. It may reasonably be assumed that most of those who suffered in the Studebaker debacle were so-called Greatest Generation workers; few Boomers would have been employed long enough, in 1974, to be vested in retirement plans. So even from its outset, it was meant to help the so-called Greatest Generation, a generation that should really be known as the Greediest.
Soon after its enactment, ERISA became known among business owners and executives as the Lawyers and Accountants Full Employment Act, due to the horrific compliance standards written into it. A joke went around about a business owner asking his accountant how he could best cover his employees with a pension plan, and whom to cover. After a number of convolutions, it turns out that the business owner decides to cover only one person, himself, letting his employees fend for themselves. While it was often told as a light story about US business, it was also shorthand for what was actually happening. Business owners, unwilling to comply with the rules under ERISA, soon came up with the 402(k), shifting total responsibility for pensions for their employees to those employees themselves, rather than to the business they enriched or fund managers who knew what they were doing (to a point.)
Also established under ERISA was the Pension Benefit Guaranty Corporation (PBGC) to insure the pensions of workers covered by private defined benefit pension plans. It does not cover 401(k) plans, the sort of plan most prevalent for Baby Boomers.
After 1974, as employers faced with stiffer requirements for defined benefit retirement plans, they had been dropping those plans, leaving employees with no choice except “on the economy savings and investments” and IRAs, Individual Retirement Accounts. IRAs were also established under ERISA, initially with low limits for contribution.
In 1978, Congress added section 401(k) to the Internal Revenue Code. It eliminated taxes on work income employees chose to receive as deferred compensation. The law took effect on January 1, 1980; by 1983, almost half of large firms were already offering 401(k) plans or considering it. A year later, additional legislation ensured that all employees could take advantage of the plans equally, and not just highly paid employees.
“By 2003, there were 438,000 companies with 401(k) plans, according to History of 401(k) Plans: An Update. Employee Benefit Research Institute. 2005-02. http://www.ebri.org/pdf/publications/facts/0205fact.a.pdf.
Because these were originally meant for executives, they often came with a company match which the law required be applied equally for low- and high-paid employees.
A wealthy company used to benefit employees; no longer
Even with employee contribution matches by employers, 401(k) plans were cheaper to maintain. Legally, employers were required to pay only plan administration and support costs, although some of these costs could be legally passed on to the employee. In addition, where an employer was required to be consistent with its contributions to a defined benefit plan, with defined contribution plans ― and ones, moreover, in which it was legal for employers to reduce or eliminate matching contributions in some years ― the employer could predict its outlay; it didn’t have to play catch up, diminishing stockholder dividends or executive perks in “down” years to ensure the defined benefit for each retiring employee.
In a word, ERISA, one way or another, shifted virtually all of the risk involved with pensions to the employee. The employer, however, could build goodwill simply by making contributions every few years, if it chose. And it could pass on all the former pension costs to stockholders and executives. Who were they in 1978? In 1980? Arguable in 1983? Right. The Greeders.
Edward Harrison, an incisive writer who blogs at www.creditwritedowns.com, is only too aware of the effect ERISA has ended up having on Baby Boomers.
Harrison quotes an MSN Money article in which a current 35-year-old laments the prevalence of the 401(k) as a retirement planning tool.
Boomers take all the risk for none of the benefit
“There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year,” Harrison reported.
Harrison noted that, in fact, many retirement gurus had concluded, with the young woman, that 401(k)s had serious flaws.
Harrison also reported the conclusion of Robyn Creidco, head of defined-contribution consulting at Watson Wyatt Worldwide, that the 2008 stockmarket meltdown was the biggest test of the 401(k) to date, and the 401(k) had failed.
Harrison concluded that “The most obvious pitfall is that 401(k) plans shift all retirement-planning risks — not saving enough, making poor investment choices, outliving savings — to untrained individuals, who often don’t have the time, inclination or know-how to manage them.”
In addition, then, to having money available to contribute (and thus gain such employer matches as there might be), there’s the problem of expertise. While a 35-yrear-old might have time to make mistakes while mastering a difficult market that has recently become even more volatile, a 58-year-old does not. In short, Boomers who are going bust will stay that way until they die, but the Greediest Generation? Not so much.