This is part of a week-long series about Social Security. If you want to read the whole series, links are provided at the bottom of this post.
Once upon a time, America was a place in which you finished school and settled down with a nice company, which took care of you from that day until the day you died. It was a time of magic and ponies for all.
Okay, there was never a time like that for everyone. There were always service workers and migrant workers. There were always classes of people excluded from the secure jobs. There was always a battle between management and labor over how much financial security was a fair trade for work. But for a few decades, labor did a lot of winning in that fight.
Then we hit the 1970s, and our car- and interstate-based economy received a big blow when oil prices jumped. Management didn’t always react well to that, but they did do something that was, from their point of view, smart. They told us that unions were too expensive, that paying some labor wages and benefits that made them economically secure just raised prices for everyone else.
In a country where prices were climbing quickly, this was a very effective message. Other messages were crafted to tell us unions were selfish and un-American. Corruption within some of the largest unions contributed to the idea that a union was just a way to skim unearned cash from the economy. Labor began its decline.
It didn’t happen all at once. It’s taken decades to get where we are, but it did happen. The decline of retirement security has been part of it.
The decline of the pension plan has not all been about a money grab from labor. Traditional pensions were largely calculated on one of a number of pay-times-service formulas. This worked very well when employees worked at one company for most of their life. It worked less well for employees when they changed companies a few times. When that happened, they now had multiple pensions based on multiple chunks of service, some of which were calculated using prior, much-lower pay levels.
Still, whatever the reasons for the decline, this now means that far fewer workers are covered by pensions. This chart based on data from the Pension Benefit Guarantee Corporation, the government agency that insures pension plans against the failure of the sponsoring company, shows how the percentage of U.S. workers covered by pension plans has declined over the last three decades. Note that it also demonstrates how far we were even then from a nirvana in which all workers were covered.
Not only are there very few workers left covered by pensions, but many of those are older workers. The numbers will only continue to decline, and quickly.
As employees stop being covered by pensions, they often also see a decrease in their benefits. Some companies did make the change because they wanted to save money. Some simply wanted to stay cost-neutral, and 401(k)-style (defined contribution) plans cost more for the same benefit. That means benefit levels don’t tend to stay the same.
Additionally, employees who are moved out of pension have less of a promise that their benefits will remain stable. Given the regulation around pension plans, it’s a very cumbersome thing to make a change to benefits, particularly a temporary change. The same cannot be said for defined contribution plans, as many workers found out after the housing bubble burst.
The percentage of employers offering 401(k) matches was at 73 percent in 2005, peaked at 76 percent in 2006 and fell to 67 percent in 2009. The savings rate for participants slipped from 7.23 percent in 2007 to 6.91 percent in 2011, according to Schwab data.
“Our expectation would be that we’ll continue to see this tick up over the next couple of years, assuming nothing unforeseen happens in the economy,” Gray said. “As folks get more comfortable, as employers get more comfortable, we expect that we’ll see that rate slowly tick back up.”
Companies that were experiencing financial troubles, or even just declines in revenue, passed that on to their employees, something they wouldn’t have been able to do easily with pension plans. Employees who considered that match part of their income suddenly found themselves making less. They also missed the opportunity to add to their retirement savings at discounted rates, while stocks and bonds both were less expensive. That timing will have effects on the amount of money available to employees at retirement that are magnified well beyond the simple amount of money that companies did not contribute.
Contrast all of this with Social Security. Because it is a benefit based on your pay as you approach retirement, it is a fully portable benefit. It doesn’t matter how many companies you work at, just how much money you make at them. Additionally, a company does not have the option to make you pay for their decline in profits. Barring an act of Congress, their contribution to your retirement stays steady no matter what happens.
Unless you think we’re about to return to the days of strong unions and life-long careers, that’s worth thinking about.
The full series: