—From The Big Squeeze: Tough Times for the American Worker by Steven Greenhouse, published in April by Knopf.
For the first time since the Depression, the personal savings rate for American workers fell below zero in 2005—and it has remained there since—meaning that Americans are spending more than they earn and saving nothing on a net basis. Social Security benefits, some economists predict, will fall from 42 percent of the average worker’s pre-retirement earnings to 32 percent over the next two decades. And companies are moving aggressively away from pensions. In 1982, 84 percent of full-time workers in companies with more than 100 workers had traditional pensions, which promise a monthly income stream for life after retirement. Today less than 33 percent do. As a result of these trends, says Teresa Ghilarducci, a pension expert at Notre Dame, “the baby boom generation may be the last generation to enjoy a more comfortable retirement than their parents.”
Among retirement planners, the rule of thumb is that for people to maintain their lifestyle, their income after they stop working should be 70 to 80 percent of their pre-retirement earnings. Baby boomers who are retiring now, often in their late 50s or early 60s, average 77 percent. But some leading experts say that for Americans who reach retirement age in 10 or 20 years the average will fall to 65 percent. A study by the nation’s leading research center on retirement, the Center for Retirement Research at Boston College, estimates that 43 percent of today’s workers will not be able to maintain their standard of living if they retire at age 65. “This is a crisis in the making,” says Alicia Munnell, a former White House economist and now director of the Boston College center.
Companies’ most popular pension-cutting strategies are to freeze their pension plans for current employees, close them to new employees and offer 401(k) plans. When companies freeze their pension plans, it means that the anticipated pensions of workers in the plan will never increase, even if they stay with the company another decade or two.
Advocates of 401(k)s say the plans are preferable to pensions because they place a smaller cost burden on corporations and foster self-reliance. But 401(k)s are usually far less effective and reliable than pensions in assuring retirement security. With 401(k)s, retirees essentially receive a lump sum, which they must manage. Many workers, however, have scant expertise in investing. And nearly half of workers cash out their 401(k) accounts when they change jobs, often leaving them with a small nest egg when they retire. The median amount that Americans have in their 401(k)s is surprisingly small, just $28,000 in 2004, with the bottom half of workers by income having a balance average of less than $6,000. For workers on the cusp of retirement, between 54 and 65, median 401(k) holdings were $61,000 in 2004. That is not a reassuring amount if you retire at age 65 and live another 20 years.