With last week's passage of a 907-page pension reform bill, you may think you have more retirement security. Think again.
The new law does require companies to fully fund their "defined benefit" pension plans -- plans that guarantee retirees a certain fixed sum of money per month. That's a step in the right direction. But the law eliminates any incentive for companies to set up such plans in the first place.
In fact, incentives are now just the opposite. There's no requirement that companies offer defined benefit plans, or keep the ones they have in place. So now that they have to fully fund them, expect a stampede of companies following the lead of Hewlett-Packard, Verizon, Motorola, and IBM, and terminating their defined-pension plans altogether. If a company has contracted with its unionized employees to offer such a plan, expect them to follow the lead of several major airlines and threaten to, or in fact, go into bankruptcy to get out from under the contract.
As recently as 25 years ago, more than 80 percent of large and medium-sized companies offered defined-benefit pensions. By 2005, fewer than a third did. What happened?
In an era of fiercely competitive cost-cutting, companies will do what's cheapest. And it's cheaper to switch to what are called "defined contribution" plans, like 401-Ks, where employees decide how much of their paychecks to put away. The incentive for employees to put away some of their paycheck is they don't have to pay taxes on what they save until they withdraw the money at retirement. But that incentive hasn't been enough. In recent years, one out of three employees with the option has not taken advantage of it.
The new law lets companies automatically enroll employees in such plans unless the employees specifically choose not to join. That's good. But the law doesn't require employers to provide any matching funds, not even a dollar for every three socked away by the employee. Given the same competitive pressures to cut costs that's been killing off defined-benefit plans, this means we can expect fewer and fewer employers to contribute anything.
I'm not blaming companies. They have to show profits by squeezing payrolls. Wall Street is demanding it. And I'm not blaming employees. Many can't afford to save. How could they? Adjusted for inflation, hourly wages today are lower than they were thirty years ago. I'm blaming Congress for failing to level the playing field and require all companies to do more.
Seventy-six million baby boomers are heading full speed toward retirement. But most are not saving. The new pension law won't get employers to save for them. And even if Social Security were rock solid, it's not nearly big enough to fill the resulting gap.
Notwithstanding 907 pages of new pension legislation, baby boomers are, as the president's father used to say, in deep doo-doo.
Robert B. Reich is co-founder of The American Prospect. A version of this column originally appeared on Marketplace.
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