Middle-class Americans' retirement at risk

— -- Through most of his working life, steelworker Ray West looked toward a secure retirement. His company pension would bring in around $30,000 a year, his union contract guaranteed retiree health coverage and he had 401(k) savings of about $50,000.

Three years ago, it unraveled. His company filed for bankruptcy. The collapse reduced his expected pension to around $5,000 a year and canceled his retiree health insurance. And, in three years of unemployment since then, West blew through all the money in his 401(k) as he trained for a new career.

"I lost my job after 27 years before I got my retirement," said West, 52, of Hazel Park, Mich. "I ain't going to get nothing."

Of all the threats to the American middle-class standard of living, from stagnating incomes to piles of consumer debt, perhaps the least understood and among the most serious is the looming crisis in retirement. Several trends, each debilitating alone, are due to converge on the middle class over the next decade or so.

Traditional pension plans are disappearing in the private sector. Workers aren't saving enough in their voluntary 401(k) accounts. Longer life spans are stretching savings even thinner. Social Security remains under stress. Furthermore, all that was going on before retirement plans lost $2 trillion in the recent stock market dive.

Taken as a whole, the trends point toward a massive problem as people now in their 40s and 50s start to retire in 10 to 20 years.

Alicia Munnell, a professor of management and director of the Center for Retirement Research at Boston College, has developed a retirement risk index that shows 43% of households are in danger of not being able to maintain their living standard once they retire. She projects that risk to grow over time, and it gets worse for those lower down the income scale.

"A transition group is really going to suffer a lot until we say, 'Let's do something,' " Munnell said. "The early boomers and particularly the late boomers are going to have a terrible time."

Baby boomers are defined as people born between 1946 and 1964, a mass of Americans just reaching retirement age.

Besides the potential human tragedy facing seniors who lack adequate means, a lowering of living standards among elderly people could blunt the growth of the American economy.

Seniors 65 and older today make up 20% of all U.S. households. As the senior portion of the population increases with the aging of boomers, widespread economic pain among elderly people could slow spending and place greater burdens on caregivers, who include families and social services agencies.

Of all the trends, perhaps the most worrisome is the failure of highly touted 401(k) private savings accounts to replace fast-disappearing traditional pensions. Not only do millions of workers not save enough, or like West drain their 401(k)s well ahead of retirement, but all the risk of making wise investment choices and planning for retirement now falls entirely on workers who have no training to deal with it.

"The goal of trying to educate everybody up so they can do this kind of thing is just silly," Munnell said. "We don't need a whole nation of financial analysts. We need people to play with their children and coach Little League and do all that kind of stuff."

Grim numbers bear out the warnings about Americans' lack of retirement-planning savvy. The Employee Benefit Research Institute reported that 49% of workers say they have total savings and investments, not including the value of their home, of less than $50,000. And 22% of workers and 28% of retirees say they have no savings of any kind.

Andrew Stumpff, a University of Michigan Law School lecturer who is an expert on pensions, said the approaching storm of unsafe retirements is part of a general shifting of risk toward ordinary workers.

"You need to regard retirement as a do-it-yourself proposition nowadays in a way that it never was for previous generations," he said.

Indeed, many younger workers have barely begun to think about the retirement challenges ahead.

Jennifer Ruud, 30, of Madison Heights, Mich., was laid off several months ago from her job as an art coordinator at an advertising agency. Since then, she's career-switched to a nonprofit agency, but $10,000 in credit-card debt and other worries have pushed retirement planning far to the rear.

"I have been trying to put money in my IRA," she said. "I think I put very little money in this year. I don't even know if I'm going to be able to put in anything next year."

Demise of pension plans

Possibly the biggest threat to retirees' living standards has been the demise of traditional pension plans in the private sector.

For decades a mainstay of retirement, so-called defined-benefit pension plans are those in which employers promise to pay a fixed amount of money to their retirees each month for life.

Those plans flourished after the 1940s as big carmakers, steelmakers and other industrial firms needed to build and keep a large, skilled, loyal work force and buy labor peace. Promising lifetime checks to retirees became common. By 1980, about 60% of U.S. workers in private industry were covered by defined-benefit pensions.

For millions of workers, having a pension simplified their retirement planning, since all a worker had to do was cash a check each month.

But as retirees lived longer and as American manufacturers faced growing competition from abroad, such pension plans began to grow more costly to maintain. Also, the rise of a service economy, in which workers are more prone to change jobs frequently, put less of a premium on career-long loyalty and rewards.

The Employee Benefit Research Institute reported recently that, as mostly smaller and medium-size employers terminated their pension plans, the number of traditional plans declined by 75% from a peak in 1985.

The plans are still common in the public sector, with the Census Bureau reporting that in 2006, more than 18 million Americans were covered in some way by a government retirement plan.

Some well-intentioned efforts to safeguard pensions may have backfired. In 1974, Congress passed the Employee Retirement Income Security Act, mandating stricter controls on private pensions.

Somewhat paradoxically, companies that were not required to provide any retirement benefits suddenly faced more regulation if they did. That provided an incentive to drop the pension plans.

Rise of the 401(k)

Another key factor in the disappearance of a fixed monthly retirement check was the rise of voluntary 401(k) plans. Based on an obscure clause in a late-1970s tax revision, the plans allow workers to defer taxes on retirement savings until they draw them at some future date.

By the mid-1990s, thousands of companies were cutting back on traditional pension plans in favor of contributing to workers' 401(k) accounts.

Under this switch, companies were no longer obligated to pay a fixed monthly benefit to retirees; instead, employers could limit their obligation to the upfront contribution to current workers. The risk of bad investment decisions shifted to employees.

The 401(k) plans didn't emerge from a national debate on how to replace pensions. They came about quietly as investment advisers explored the intricacies of the tax code and promoted the new accounts to consumers and to companies eager to get out from under pension obligations.

Today, barely 10% of workers in the private sector are covered only by a defined-benefit pension plan. And while most workers are eligible to participate in a voluntary company 401(k), economists and others who have studied the two systems say that 401(k) plans provide far less income than traditional pension plans.

The reasons: Many workers eligible for a 401(k) plans don't enroll, don't save enough, invest in the wrong things or draw out all their investments when they leave a company instead of keeping the money in a retirement account.

In theory, a worker with a 401(k) might do better than with a traditional defined-benefit pension, as long as he or she made the best investment choices. A big problem, though, is that most Americans are woefully unskilled at complex financial planning.

In one notorious example, many Enron workers lost the bulk of their retirement savings when they loaded up their 401(k) accounts with company stock shortly before Enron went bust.

But even workers who make less spectacular misjudgments are prey to costly mistakes, said Stumpff, the pension expert: "Even in perfect situations, there are going to be people who are victims of bad investment timing or otherwise victims of the markets, who are going to effectively lose their retirement savings."

Working longer

Some economists urge Americans to keep working beyond age 62 to delay claiming Social Security benefits. Working longer also allows employees to build up their retirement accounts and to defer drawing on them.

Boston College's Munnell proposes the creation of a new tier of retirement-savings program that would require workers to contribute 3% of pretax income to a retirement fund. It might mirror today's voluntary 401(k) programs but would have to be mandatory to get millions of people to participate.

Unless some sort of steps are taken, Munnell said, the nation can expect a sharp rise in poverty among its oldest citizens.

"To have people be vulnerable at that time just seems like a shameful way to run a country."

READERS: What is your retirement strategy?