Pension Bubble Loses Some Air
By DANIEL ALTMAN
January 20, 2002
ECONOMIC VIEW
he late 1990's was a golden age for stocks — and for Americans' potential retirement incomes. Assets in private pension funds doubled from 1995 to 1999, to $5 trillion. Workers plowed big portions of their high salaries of a booming economy into tax-deferred 401(k) accounts.
What a difference a couple of years can make. Though the 2001 data is not yet available, the stock market's tumble probably at least stunted the growth of pension fund assets and might have even reversed it. Some experts, meanwhile, believe that proposed legislation intended to protect retirement accounts from corporate failure, in the wake of the Enron (news/quote) bankruptcy, could reduce everyone's incentive to save.
The golden age of retirement savings was a long time in coming, said James P. Smith, a labor economist at the Rand Corporation. "The private pension system was certainly underdeveloped 50 years ago," he said.
Dora L. Costa, a professor of economics at the Massachusetts Institute of Technology, noted that before World War II, "private pensions were extremely rare, and when people did have them, they paid out puny amounts." Starting in the 1950's, companies began offering improved pensions that would pay fixed benefits to retirees. In the last two decades, the responsibility for guaranteeing income in retirement has shifted more to workers, through 401(k) plans, Individual Retirement Accounts and other tax- deferred investments.
Longer life spans helped make greater saving possible. "People live longer and lead unimpaired lives longer," said Donald O. Parsons, a professor of economics at George Washington University. "That, in the brutal world of the market, immediately translates into wages."
Professor Costa noted that longer lives also necessitated more savings. With longer retirements, people need to supply more retirement income.
For lower-income people, Professor Parsons said, Social Security did the most to promote stable standards of living in retirement.
In fact, Mr. Smith said, the combination of traditional pensions, 401(k)'s and Social Security has made retirement incomes for low- to middle-income Americans similar to their incomes while working. "There are more households with access to some money that they will be able to use to smooth their consumption during the retirement years," he said.
Scott M. Kahan, the president of the Financial Asset Management Corporation in New York, agreed. "Many people, up until the last year, were on track for a comfortable retirement — in fact, were looking to retire early," he said.
Now that picture could be changing.
Despite the fact that the government raised contribution limits for 401(k) plans, Mr. Kahan said, account balances had stopped growing and had even begun to fall. "People are looking at the year-end statements and realizing that they were losing money in their 401(k)," he said.
Soon, 401(k)'s may lose some of their attractiveness. A bill introduced by Representatives Peter Deutsch, Democrat of Florida, and Gene Green, Democrat of Texas, would limit to 10 percent the share of a 401(k) plan that may be held in company stock. Though the bill could prevent cases like Enron's, in which employees overinvested in company stock and lost most of their retirement savings after Enron's collapse, it could also have a negative effect on savings. If the limits on stock are strict, companies may see less reason to match their employees' 401(k) contributions. Some employees may then have less incentive to save.
"You're going to lose that match" if the limits are too small, said Lowell M. Smith Jr., a consultant on retirement benefits law at Invesmart. "The matches can end up being pretty significant chunks of money."
Mr. Kahan contended that the tax break provided by 401(k)'s would still be enough to entice workers to save. But even if employers continue to offer matching contributions, Americans may be saving too little.
That is the position of Laurence Kotlikoff, a professor of economics at Boston University. "People need to realize that their living standards might be dramatically lower in the future" because of a weaker stock market and uncertainty about Social Security, he said. "Over all, saving for retirement is far too little."
Retirees would indeed find themselves in dire straits if faced with any reduction in Social Security benefits, Mr. Kahan said.
"People don't realize the value of Social Security," he said. "Many times people can't save what we're telling them to, even if they plan for Social Security" to continue paying its current levels of benefits. But, he added, his clients are starting to talk about socking away more money.
nytimes.com |
