In 1970, 45% of America’s private sector workers had an employer-sponsored pension plan. By 2014, that figure plummeted to just 2%.
Once upon a time, in an America of long ago, there was a popular benefit given to the majority of workers who exchanged their labor for both a livable wage and a guaranteed retirement: the pension.
Workers were able to commit to a job, live a comfortable life and never have to worry about how they’d keep the lights on after receiving their gold watch and leaving the company they’d been loyal to for the past 30 years.
Fast-forward to 2023, and a lot has changed.
Pensions (a.k.a. defined benefit plans) have joined cable television, payphones and malls on the long list of “remember when.”
Not because of obsolescence, though. Pensions simply went away because employers figured out a way to no longer have to pay for them.
Defined Contribution Plans
Outside of public service vocations, pensions have given way to defined contribution plans (e.g., 401(k) and 403(b) programs), meaning the onus of saving for retirement has been shifted from the employer to the employee.
According to the National Public Pension Coalition, the 401(k) was originally intended to be a supplement to Social Security and defined benefit pensions — a means for workers to save a little extra toward their retirement — but by no means was it intended to become the basis of their retirement income.
But during the Reagan administration, changes to the 401(k) provision allowed it to become more widely adopted and, ultimately, replace companies’ need to provide pension programs for their workers.
The result? Private sector pension plan enrollment went from 45% in 1970 to just 2% by 2014.
The effects of that have been debilitating to Americans’ retirement plans:
- One in three Americans has $0 in retirement savings.
- 46% of Americans aged 40-49 have been forced to withdraw money from their retirement savings accounts (which is accompanied by financial penalties).
- For Americans aged 55-64 who do have retirement accounts, the average monthly distribution they’ll receive after retirement is just $310.
That’s why it’s shameful to see companies like Walmart (WMT) using 103-year-old greeters as the focal point of feel-good PR pieces, when those workers should be playing bingo, knitting or doing whatever else it is that 103 year olds do.
Types of Plans
As a retiree, you can’t solely rely on Social Security. If many in Washington, D.C., had their way, it’d already be gone. And FDR would roll over in his grave if he knew they’re planning on increasing the age of retirement again, this time to 70 years old.
Fortunately, there are several options you can choose from to supplement your Social Security income whenever you do decide to hang up the gloves, whether or not your employer sponsors a plan.
Traditional IRA Vs. Roth IRA
For those who don’t have access to a 401(k) or 403(b) through your jobs, or for those who lack confidence in the plan provided by your employers, there are individual retirement accounts (IRAs).
The biggest difference is how they are taxed. Traditional IRAs are typically tax-advantaged personal savings plans where contributions may be tax-deductible. On the other hand, contributions to Roth IRAs are not tax-deductible, but qualified distributions from the plan (after retirement) may be tax-free.
The annual contribution limit for an IRA is $6,500, but if you’re over the age of 50 and trying to catch up, that limit increases to $7,500.
With both types of IRAs, any earnings, capital gains, or dividends are not taxed as long as they remain in the account.
Lastly, if neither you nor your spouse is covered by a retirement plan at work, your IRA contributions are fully tax-deductible.
401(k) Vs. 403(b)
For employee-sponsored programs, there are mainly 401(k) and 403(b) plans, both of which are tax-advantaged.
The major difference being 401(k) plans are offered by private, for-profit companies. 403(b) plans, on the other hand, are offered by tax-exempt and nonprofit organizations.
The most notable benefits of these programs are that (1) contributions are pre-tax, and (2) companies can offer matching that allows workers to increase what they’re able to save and have their principal compound faster.
TL;DR
Since the disappearance of pension plans, Americans are failing to adequately save for retirement, but it’s never too late to start, whether through a company-sponsored 401(k) or an IRA you manage yourself. In this month’s issue of The Big Idea, we’ll be sharing some ideas about how you can catch up, and if you’re already saving, we’ll explain how to bolster your retirement nest egg.