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A Retirement Crapshoot?

By Albert B. Crenshaw
Sunday, December 12, 2004; Page F01

Last week's disclosure by International Business Machines Corp. that it will close its traditional pension plans to new employees and give the new hires only a 401(k) plan is more than a change in the relationship between employer and employee. It is part of a fundamental shift in our sense of what American society owes individuals in the form of financial protection and what individuals owe society in terms of self-reliance -- a shift of a magnitude unseen since the 1930s, when it went in the opposite direction.

IBM itself is only a small ripple in this wave. The company styles itself as "a follower, not a leader" in this arena, and few would dispute that. But its decision to fade out of the pension business is emblematic of a massive shifting of risk that is taking place across the economy.

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Employers, unwilling and increasingly unable to promise their workers a secure retirement, are handing that problem off to the workers themselves. Most companies, like IBM, will chip in some extra pay in the form of an "employer contribution" to a 401(k) plan or similar plan, and a growing number will offer some advice on what to do with the money. But if things don't work out a few decades from now -- well, tough.

And now the Bush administration says it wants to do something similar with Social Security. Instead of a set of benefits fully guaranteed by the government, the administration envisions some type of "personal accounts" -- details to come -- that could accumulate real wealth over a worker's lifetime.

Could accumulate.

It is certainly true that people who take risks can end up very well off. The economic winners in our society are often described as risk takers. But there is no guarantee. Far from it. In fact, if getting wealthy through investing were a sure thing, there wouldn't be any risk. If that were the case, it might fairly be said that anyone who didn't do it would have only himself or herself to blame.

Employers are relatively candid about all this. Though they use words such as "volatility" and "unpredictability" to describe what they don't like about running a traditional pension, what they are really talking about is the risk that accompanies investing. They don't like it. And they're happy to hand it off to their workers.

The government has run afoul of a different sort of risk. Instead of investing the surplus revenues generated by Social Security payroll taxes over the years, it has spent that money and replaced it with IOUs from the Treasury. That might have worked but for demographic changes. Americans are living longer in retirement and having fewer children, so the number of workers who pay into the system has declined drastically relative to the number of retirees drawing from it.

In 2018, Social Security projects, withdrawals will begin to exceed revenues, and the system will have to start cashing in those Treasury IOUs. The Treasury in turn will have to go out and borrow that money from the public.

Given the government's performance, the idea of investing on your own does have its appeal. Do it right and you may get rich, which you certainly won't off Social Security.

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