IMPACT ON WORKERS
Retirement Savings Lose $2 Trillion in 15 Months
Wednesday, October 8, 2008
The stock market's prolonged tumble has wiped out about $2 trillion in Americans' retirement savings in the past 15 months, a blow that could force workers to stay on the job longer than planned, rein in spending and possibly further stall an economy reliant on consumer dollars, Congress's top budget analyst said yesterday.
For many Americans, pensions and 401(k) plans are their only form of savings. The dwindling of these assets -- about a 20 percent decline overall -- is another setback just as many people are grappling with higher gas and food prices, more credit card debt, declining home values and less access to loans.
"Unlike Wall Street executives, American families don't have a golden parachute to fall back on," said Rep. George Miller (D-Calif.), chairman of the House Committee on Education and Labor. "It's clear that Americans' retirement security may be one of the greatest casualties of this financial crisis."
Even traditional pension plans, which are formally known as defined-benefit plans and are widely considered more stable, have been hit hard by the stock market's volatility, losing 15 percent of their assets over the past year, Peter R. Orszag, director of the Congressional Budget Office, told the House panel.
Despite the losses, companies will still be obligated to pay out the same pensions promised to employees but will have to recoup the extra costs in other ways, Orszag said. "When pension assets decline in 401(k) plans, the burden is on the workers," he said. "When pension plan assets decline in defined-benefit plans, the burden is on the firm to make up the difference. The firm will have to pass those costs on to their workers, to their shareholders or to consumers."
Defined-benefit plans are company-sponsored programs that provide retirement payouts based on an employee's salary and tenure. The company shoulders the bulk of the investment decisions and risk. Defined-contribution plans, such as 401(k)s, turn those tasks over to the worker and are subject to the whims of the stock market.
Increasingly, employers have switched workers into defined-contribution plans. The federal government has also pushed 401(k) plans heavily, approving a law late last year that makes it easier for employers to automatically enroll their employees in them and other similar retirement plans.
Defined-contribution plans tend to be more heavily weighted in stocks, either through individual holdings or mutual funds. As a result, said Orszag, "the value of assets in defined-contribution plans may have declined by slightly more than that of assets in defined-benefit plans."
Through September, the percentage loss for the year in average account balances among 401(k) participants was between 7.2 and 11.2 percent, according to the Employee Benefit Research Institute's analysis of more than 2 million plans.
Employees between the ages of 56 and 65 who had the fewest years on the job were the least affected, while those 36 to 45 years old with the longest tenures suffered the steepest declines, said Jack L. VanDerhei, research director for the D.C.-based institute. Younger workers tend to have more stocks in their portfolios while older employees move toward safer investments such as bonds, VanDerhei said.
The findings exacerbate a complaint among many workers and academics about 401(k) and similar plans that are heavily tied to the stock market. Are they really the best retirement vehicles for workers?
"The loss of retirement security is a reversal of fortune and the result of very specific flawed governmental policies that have been biased toward 401(k) plans, rather than the result of technological change or the logical consequences of global economic trends," Teresa Ghilarducci, a professor of Economic Policy Analysis at the New School for Social Research, testified before the committee.