The Baby Boomers' Vanishing Pensions
Congress has caused them; now it should work toward a solution
AMERICANS born between 1946 and 1964 are in for a rude shock. Baby boomers - some 76 million strong and now in their prime earning years - are saving nowhere near enough to have even a semblance of a comfortable retirement when the generation begins to leave the work force early in the next century. And by 2030, there will be a 40 percent drop in the number of workers per retiree, placing a huge burden on working Americans and threatening retirees' security even further.
Today, private saving per worker is only about one-third of what's needed to maintain boomers' accustomed living standards in retirement. Given our country's large deficit and almost inevitable changes in Social Security, most baby boomers are likely to face a lower standard of retirement living than their parents now enjoy.
Boomers themselves, of course, bear some responsibility for this situation. But they are also entitled to ask business and government, where is the money for our pensions? Why is it that total pension coverage has not increased since the early 1970s? Why is it that from 1985 to 1991, total private pension contributions (in constant 1987 dollars) declined 22 percent? Why have employer contributions to pension plans shrunk, in real terms, more than 50 percent from 1980 to 1991?
Much of the blame for today's crisis in employer pensions can be laid squarely at the feet of Congress. In search of easy revenue, for the past decade Congress has systematically chipped away at businesses' ability to offer and fund pensions.
If Congress wants to help Americans shoulder more individual responsibility and increase national saving, it should move pension reform to the top of its agenda.
For the past two years, I have chaired a Committee for Economic Development working group of business and education leaders exploring how we can expand private pension coverage and funding, increase national saving, and avert the looming pension disaster.
If we take certain actions quickly, these goals can be reached. First, we concluded the federal government must remove barriers to private pension coverage and greater personal saving by streamlining pension regulation and taxation.
Over the years, amendments to the 1974 Employee Retirement Income Security Act (ERISA, the basic US pension law) and the tax code have sharply hiked costs and discouraged new plans.
Complex anti-discrimination rules have created regulatory paralysis. Over 600 pages of nondiscrimination rules require complex calculations for every employee, every year - even for the smallest plans. Today, pension regulations are so complex that it's practically impossible for any plan to comply fully with ERISA provisions. Worse, in 1982, the Tax Equity and Fiscal Responsibility Act reduced by a third, and then froze, maximum annual contributions and benefits for certain plans.
From a national saving perspective, the most serious attack on retirement saving was launched by the Omnibus Budget Reconciliation Act of 1987, which forced many firms to stop funding their plans for several years.
Congress could remedy these problems, first, by replacing the thicket of regulations with a simple requirement that all employees who meet the same, nondiscriminatory age and service requirements be covered and subject to the same ratio of employer pension contributions to wages. Second, federal regulation should encourage full funding of private pensions, and the full funding limit for defined benefit plans should be restored to its pre-l987 level of 100 percent of projected plan liability.
To encourage more saving and more new plans, Congress should raise the annual limits on allowable plan contributions and benefits to more reasonable levels.
A very important reform would base retirement-saving tax preferences on accumulated lifetime income rather than on current-year income only. Workers could then make up in peak earning periods the smaller savings of their early (and often poorer) working years. This would be much fairer to those who temporarily leave the labor force.
Raising national saving through a saner pension policy is essential for America to amass the necessary capital to invest in the physical, technological, and human resources necessary for prosperity.