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Social Security

Caught in the Pinch of a Pension Predicament

By Spencer Rich
Washington Post Staff Writer
Monday, November 25, 1996; Page A01

Teena West started working when she was 14. Her first job was dipping shoe soles in glue at a footwear factory, but over the next 50 years, the Chicago native toiled as a secretary, a clerk, a bookkeeper and a credit manager for about 20 different employers.

Yet in all those jobs, with only one year off for childbearing, West earned just one small pension. It now pays her $381 a month, which, combined with the $800 she gets from Social Security, is all the 70-year-old woman has to show for her lifetime of work.

"I have cancer," she said. "It's very difficult to live after paying hundreds of dollars every month out of pocket" for medical expenses Medicare won't cover. Long divorced, she can scrape along only because a son gives her a rent-free attic apartment. "If I had to pay $500 rent," she said, "where would I be?"

As difficult as West has it, Eva Grant's financial straits seem worse. Now retired at age 68, Grant too worked steadily over the course of five decades, as a welder in Brooklyn, N.Y., an elevator operator in Washington and a spray painter in a Venetian blind factory, along with a multitude of other jobs in hospitals, nursery schools and private homes.

"I never earned any pension," said West. "My income is $500 a month, from Social Security and welfare."

The lives of these women reflect the plight of millions of current and future retirees who, aside from Social Security, have little in the way of pensions to rely on.

Less than 40 percent of the 33 million Americans age 65 or over collect a pension, government research suggests, with the average recipient receiving less than $10,000 a year. And on any given day, only half of all workers are in jobs in which they are earning credits toward pension plans.

At one time there were high hopes that the bulk of workers would someday be in jobs providing adequate pensions. And indeed, from the late 1930s to the 1960s, coverage grew at a phenomenal rate, from only 15 percent of employees to nearly 50 percent by 1970, Labor Department data show.

But ever since, the growth has virtually stopped. And figuring out how to rev it up has become the consuming policy issue for labor economists, consumer advocates and lawmakers nationwide. So far, 20 years of government initiatives aimed at spreading the pension net wider have proven largely futile.

"The private retirement system just isn't working for a majority of American workers," contends Karen Ferguson, director of the Pension Rights Center and co-author with Kate Blackwell of "The Pension Book."

The problem could become more glaring 15 years from now as members of the baby boom generation start retiring in larger numbers. Their arrival in the golden years will undoubtedly put a severe financial strain on the Social Security system, which remains the single main source of income for the elderly. Yet if Social Security is scaled back to maintain its solvency, policy analysts say, the absence of a more widespread private pension system could leave many baby boomers in trouble.

"Social Security is very important as a base of income to the elderly, but it was never intended to be the whole income," said Martha McSteen, former Social Security commissioner who heads the National Committee to Preserve Social Security and Medicare.

In part, the failure of pension coverage to expand to greater numbers of workers reflects changes in the nation's work force, according to labor officials and others who follow the issue. Today, most of the new jobs are being created by small service firms where pension coverage is traditionally sparse. Added to that is the escalating use of contract workers and temporary employees, pockets of the work force in which benefits are rarely bestowed.

Others have cited the pressure of international competition on profits, the weakening grip of trade unions in recent decades, and the slowdown in productivity growth over the past quarter century.

"When productivity was rising sharply there was money to burn on pensions," said attorney Michael Gordon, who helped write the 1974 pension reform law.

While all these labor trends were occurring, corporate America was undertaking a mass retooling of the very notion of retirement and the type of benefits that should be offered. A generation back, almost everyone with pension coverage had what is known as a "defined benefit" plan, where companies paid into a pension fund over the years and when employees retired, they received a monthly check based on their earnings and years of service.

Those plans are becoming less common. Employers today are increasingly turning to "defined contribution" plans, like 401(k) accounts, which require workers who want to participate to contribute a certain amount of money each payday into a tax-deferred retirement account. Often, the company matches at least a percentage of those funds, but not always.

For the company, these plans are attractive because it is the worker who generally puts in the bulk of the money. These plans also free the company from the unpredictable cost of making payments to workers indefinitely into the future, as they must do in traditional plans. And, indeed, there are strong advantages for employees too: Workers can often choose where the money is invested, and if they switch jobs, they can usually take the account with them.

But there is a downside. For one thing, many low-income workers simply don't join 401(k) plans even when their employer has one, for fear of the bite such contributions will take from their paycheck.

The increased flexibility of 401(k) plans also brings consequences. When workers switch to a new job or reach retirement age, they often remove this money in a lump sum and spend it on something other than retirement. Studies by the Employee Benefit Research Institute suggest that up to a third of the money from the lump-sum withdrawals is actually spent on education, cars, boats, vacations, summer homes, medical expenses and other big-ticket items.

Roger Conner, director of a nonprofit group in Washington, learned firsthand the consequences of this new-found freedom.

A few years ago, Conner was approached by a lifelong friend searching for investors to join him in a new business venture. Thinking it might be a good opportunity, Conner put $50,000 from his only tax-deferred retirement plan into the venture. It failed, and Conner lost all his money.

"That was a permanent mortgage on my future," he said ruefully.

To be sure, the current pension system is working for millions of people. Leonard Leeb, a history professor at a New York college for 33 years, is now 62 and well set for the golden years. Through his career, he was covered by an employer-sponsored retirement plan to which he also contributed money. And though his salary never topped $42,500, he will get $60,000 a year at full retirement.

Sylvester Schieber, vice president of the consulting firm Watson Wyatt Worldwide, predicts there will be more Leonard Leebs in the future. Schieber believes the picture isn't as gloomy as the current figures suggest to some. He contends the proportion of the elderly who get pensions when they retire is likely to increase substantially over time because pension rules are changing. Some current retirees never earned pensions because part of their working lives occurred in an era when pension coverage was lower than it is today, when women rarely worked outside the home, and when the government had looser pension rules.

And, indeed, there have been improvements in some areas, as Schieber and others note. Thanks to changes in the law, employees covered by a traditional pension plan must work only five years today in order to earn the right to receive something in retirement. A generation ago, many firms required an employee to work a decade or more before becoming eligible for a pension.

It's much more likely today that a person will work in at least one job where he or she earns a pension, Schieber and others note. And with a 401(k), even young workers who stay in a job for only a couple of years can accumulate some money that they can roll over into retirement accounts when they leave a job.

Schieber predicts that eventually as many as two-thirds of retirees will end up with some type of retirement benefit.

Still, there is widespread agreement that efforts should be made to expand the pension system so that more people are covered.

In an earlier era, it may have been plausible for the federal government to simply mandate wholesale change in order to induce private companies to provide for their workers' retirement. A commission appointed by President Jimmy Carter recommended just that in 1980. Opposed by business, the plan died.

Since then, the public mood toward big-government solutions has grown more wary, which has left policymakers searching for more tempered solutions. One strategy is to simply keep up a drumbeat of warnings to the public: Invest in your own future or risk being left in the cold.

To encourage employers to do their part, the Clinton administration and several members of Congress are working to develop a variety of new incentives. Several of these proposals passed in the last Congress, but whether they will have a large impact is unclear.

One new provision will allow employers to adopt a plan in which their workers can contribute up to $6,000 a year tax-deferred into a simplified 401(k). The employer then would have to match up to 3 percent of the employee's pay. To escape paperwork and investment decisions, the employer would simply hand the account over to a bank, insurance firm, mutual fund or other trustee. The thinking is that this will induce more small employers and their workers to participate because the system is simpler and potentially more lucrative for those who participate.

Another new law calls for a change in the rules of multi-employer retirement plans. These plans, which allow a number of firms that otherwise would not offer a pension to band together, now require a worker to have five years of seniority, half the time that had been required up to now.

A bill sponsored by Sens. James M. Jeffords (R-Vt.) and Jeff Bingaman (D-N.M.) would let employers voluntarily put up to $5,000 per worker into a pension plan. An employee could voluntarily match that on a 2-to-1 basis up to certain limits. A key feature would allow an employee who switches to another firm with a similar plan to keep the money from both firms in an outside account managed by a huge investment firm.

But whether it will fly in Congress is far from certain. And even if it does, what's clear is that any of these efforts to reform the system will still require people to take more responsibility for financing their retirement.

"Wherever you are, whatever you're doing, there's no such thing as saving too early or too much for retirement," said Dallas Salisbury, president of the Employee Benefit Research Institute. "Because you may be that lucky person that lives to 105."

Funds for the Future

The higher a worker's income, the more likely he or she is to be covered by a traditional pension or other retirement plan on the job. Public sector workers, and those over 30, also have a higher rate of participation.

By Income
$50,000 or more 79.6%
$30,000-49,999 75.1%
$25,000-29,999 64.4%
$20,000-24,999 60.6%
$15,000-19,999 29.3%
$5,000-9,999 12.9%
Under $5,000 3%

Retirement Plan Coverage, Private Sector: By Age
Covered by plan Employer doesn't sponsor plan Ineligible/denied Declined coverage Don't know why not covered
Under 30 32% 46% 10% 7% 5%
30 and over 56% 34% 4% 3% 3%

Retirement Plan Coverage, Public Sector vs. Private Sector
Covered Not covered Don't know
PUBLIC SECTOR 77% 20% 3%

NOTE: Figures are from 1993.
SOURCES: Labor Department, Employee Benefit Research Institute

© Copyright 1996 The Washington Post Company

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