By Seth D. Harris
Dec. 20, 2019
In recent decades, the American workforce has undergone sweeping changes. Globalization and technology have conspired to reduce the percentage of middle-wage, middle-skill jobs in the economy.
The explosive growth of Internet-based communications has made remote work — whether locally or globally — much more central to many employers’ business models. Even the structure of work relationships has changed, as short-term, part-time, and independent work have become commonplace.
These changes, and others, have forced millions of today’s workers to play a much more active role in building and managing their own retirement savings, putting millions of Americans at risk of running out of money in retirement. And that’s a major worry for working Americans. According to the Alliance for Lifetime Income’s “Protected Lifetime Income Index Study,” 80 percent of Americans express anxiety they will outlive their savings.
The most important shift in the workplace affecting workers’ retirement is the migration from defined-benefit retirement plans — known to most of us as pension plans — to defined-contribution plans, like 401(k)s. According to the U.S. Labor Department, in 1975, 75 percent of working or retired Americans who had an employer-provided retirement plan were enrolled in a pension plan. It was one of several defining characteristics of a middle-class job during that era. In 2016, about 26 percent of employer-plan beneficiaries were enrolled in a pension plan.
With a pension in retirement, workers could count on regular, reliable checks for the rest of their lives. They didn’t make them rich, but with Social Security, pension checks allowed people to sustain preretirement lifestyle or something acceptably close. The employer put our pension money aside, hired an expert to invest and manage the money, pooled the money to get better investment and administrative deals and generally figured out how to make it all work.
With 401(k) plans, most American workers save their own money, choose how to invest those savings, and hope they will have enough so they won’t outlive it. There is no protected monthly income. Retirement planning is less institutionalized and more individualized. And more Americans bear more risks: longevity risks, health risks and the risk that investments will decline in value at the wrong time.
So, risks and responsibilities have shifted. But there are other factors at play in American work relationships. According to recent Department of Labor data, later-stage baby boomers have held 12.3 different jobs over the course of their careers.
When workers change jobs, they too often cash out their retirement, pay a tax penalty and reduce their savings. Others may actually lose track of multiple retirement accounts left behind on the trail of former employers. That’s savings they will need.
In addition, millions of Americans are in alternative work arrangements, including the gig economy or as self-employed or temporary staffing workers. Independent contractors can’t have an employer-provided plan because they don’t have an employer, so they are less likely to save. Others in alternative work relationships don’t receive the same retirement benefits as full-time, full-year workers. Even part-time workers are often left out of employer-provided plans.
These trends have only made establishing a guaranteed and reliable stream of lifetime income in retirement — like a pension — more strenuous and less likely.
There is another way for benefits managers to help employees secure protected lifetime income in retirement in addition to pensions and Social Security: annuities. Weekly, bi-weekly or monthly annuity checks function similar to the paychecks most Americans receive from their jobs, providing the reliability of protected lifetime income that most American workers are currently lacking in their retirements.
The good news is that Congress seems poised to enact legislation that will make it significantly easier for employers sponsoring defined-contribution retirement plans to offer annuities to their employees who participate. The bad news is that only 56 percent of employees participate in an employer-provided retirement plan.
So, even if their employer plans include annuities, there will still be a large number of working Americans — some employees, independent contractors, temporary staffing workers and others — who will have to find their own way to annuities.
The task is to make protected lifetime income a regular part of retirement planning discussions in public policy circles, around the dining room table among family members, and between financial professionals and their clients.
No single retirement strategy will work for everyone. But broadening the conversation will benefit millions of Americans who are worried about the effects of workplace change on their retirement.
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