Posted on 06/22/2006 10:26:20 PM PDT by 11th_VA
Tired of reading about America's retirement woes? Then I have an alternative for you: Watch a TV show about them. Heck, you don't even have to move to your TV -- you can watch it on your computer, from the comfort of your own desk chair. The particular program I'm talking about is an episode of the PBS series Frontline titled "Can You Afford to Retire?"
Of course, since you've clicked on this article, you can't be too tired of reading about all of the impending retirement woes out there, so let me sum up the program's main points and then explain how you can be an extraordinary American by actually being able to retire.
Goodbye, pensions ... unless you're the CEO We all know that thousands of pensions are underfunded. We've heard the tales of people who dedicated their lives to a company, only to see it slip into bankruptcy and take all of its retiree benefits with it. The Frontline program rightly started off by discussing the demise of the traditional pension -- it focused on current and former employees of United Airlines (Nasdaq: UAUA), which filed for Chapter 11 bankruptcy protection in 2002 and dumped its pension plans on the Pension Benefit Guaranty Corporation. When the government-sponsored PBGC takes over your plan, you'll still receive pension benefits, but only a fraction of what you would have received if your company had stayed in business. (The PBGC itself, by the way, is $23 billion underfunded.)
But the real shocker in the Frontline program was the revelation of how such bankruptcies are becoming an acceptable way for companies to get out of their pension obligations. Listen to what United's lead bankruptcy lawyer, James H.A. Sprayregen, told Frontline: "I would say that Chapter 11 has become somewhat of a more accepted strategic tool than just companies filing who are about to go out of business or something like that. As a result, there's more use of Chapter 11 now than probably 20 years ago."
So should you be worried if your pension is underfunded? Well, according to a recent report from Standard & Poor's, corporate America doesn't seem to be taking pension funding too seriously. From the 2005 "Pensions & Other Post Employment Benefits Report": "While corporate operating earnings post 16 consecutive quarters of double-digit growth, corporate pension plans remain in the red with minimal contributions continuing to be made. ... S&P 500 defined-benefit plans as a group were $140.4 billion underfunded for 2005."
According to the report, here are the 10 companies with the biggest deficits:
1. Exxon (NYSE: XOM)
2. Ford (NYSE: F)
3. Lockheed Martin (NYSE: LM)
4. General Motors (NYSE: GM)
5. Raytheon (Nasdaq: RTN)
6. Pfizer (NYSE: PFE)
7. DuPont (NYSE: DD)
8. Goodyear (NYSE: GT)
9. Procter & Gamble (NYSE: PG)
10. IBM (NYSE: IBM)
It should be noted that bankruptcy might be the only way for some companies to survive, and sometimes employees have to give up something just to keep their jobs. United was certainly in dire straits. But I suspect that it's harder for the folks in the rank-and-file to accept their reduced pension benefits when, according to Frontline, executives were given $400 million in stock grants and CEO Glenn Tilton's $4.5 million was put in a special trust so that he'll still get his full benefit. Very nice.
Hello, 401(k)s ... unless you don't participate Next, Frontline discussed the shift from defined-benefit plans to defined-contribution plans -- i.e., the shift from companies being responsible for funding retirement to the employees having to do it themselves. Unfortunately, employees don't seem to be doing a good job of taking the reins. After all, they have to answer several important questions:
"Should I participate?" The answer, of course, is "yes!" But since 30% choose not to, some folks are making different choices. And we're not even talking about the 50% of workers who don't have access to an employer-sponsored plan.
"How much should I save?" The best answer is "as much as you're allowed," but, says Alicia Munnell of the Boston College Center for Retirement Research, fewer than 10% of participants contribute the maximum.
"How should I invest it?" The move to defined-contribution plans requires that every employee becomes his or her own money manager. We at The Motley Fool believe you can do it, but clearly, as we'll see later, many people aren't up to the task.
"How should I take the money out?" Frontline profiled a fellow who cashed out his entire 401(k) when he retired, resulting in a huge tax bill. Ouch. The better move: Transfer the money to an IRA, and take money out only when you need it, leaving the rest to grow tax-deferred. One of the most interesting tidbits from the Frontline episode came from benefits consultant Brooks Hamilton, who oversees 15 large 401(k) plans. At one point, he calculated the investment return for each participant in each of the plans. And, in his words, here is what he found:
"Say the bottom 20% had an investment return for the year of 4%. The top 20% would be anywhere between five and seven times that number. ... In every case, the 20% at the top not only had the highest investment income, they also had the highest average annual pay. Whereas the bottom 20% not only had the lowest investment income, they had the lowest average annual pay."
Frontline characterized the situation this way: "The richest people are getting richer, and the middle-class workers are falling further behind." This is certainly the case, but not in the same way as Glenn Tilton getting to keep his pension while everyone else's is reduced; the 401(k) system isn't rigged. We do have to recognize, however, that the average American isn't prepared to be an investment expert. Most schools don't teach personal finance, and neither do most parents. And clearly, most Americans aren't doing enough to teach themselves.
Now, we at The Motley Fool -- being the do-it-yourself, control-your-own-destiny types that we are -- are big fans of self-directed retirement accounts. And believe me, traditional pensions aren't the answer. They benefit people who stay with the same employer for decades, not the typical job-hopping American. My wife and I worked a combined 10 years at the same elementary school, and from those jobs we'll receive a combined $108 a month in retirement -- not adjusted for inflation. I would have gladly taken the 6% of my salary that the school contributed to the pension fund in the form of matched contributions to our 403(b) plans.
But the reality is, as retirement becomes the sole responsibility of the individual, many people -- because of bad decisions, bad health, bad education, or bad luck -- will have to work forever.
It's all up to you Frontline interviewed Notre Dame economics professor Teresa Ghilarducci, who said, "What is the meaning of retirement if the only way you can live is to work? The answer is, there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It's the end of retirement."
For millions of Americans, Ghilarducci is absolutely right. But it doesn't have to be that way for you. You don't have to be among the people who don't save enough, and who don't invest wisely, who don't make smart decisions about 401(k) withdrawals. If you need to learn the basics, read about the easiest retirement plan ever. For more detailed information, give our Rule Your Retirement service a 30-day free trial. You'll get access to all of our past issues and special reports, as well as our online financial-planning tool and professionally staffed discussion boards.
But whatever you do, do something. The choice between working and retiring is entirely up to you.
Robert Brokamp will rule his retirement by not paying $800 a year for basic cable. And with shows like Frontline, who needs cable? Robert doesn't own shares of any companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.
It's obscene that major corporations can set up a pension fund and not fully fund it. The fund should be a "pay as you go" thing, with a diversified investment portfolio and people overseeing it should be members of the pension.
The Exxon chairman just pulled down the biggest paycheck in history. How the h*ll can he do that when the pension isn't funded? Guess who's going to get to bail all these companies out?
How does Exxon have any pension debt whatsoever? Don't tell me, let me guess. They will dump the pensions so the taxpayers can cover them, right? And then post another $10 billion dollar profit.
Timely report.
I was planning to move intoRaytheon third quarter of this year, but if they are sopoorly managed as to make this top ten list, I'll invest elsewhere.
Thanks for the tip.
They have pension deficit disorder.
"Goodbye, pensions ... unless you're the CEO."
I just want to know how CEOs at these companies cannot be held personally liable somehow for fraudulently contracting with labor, by saying that their pensions are valid, when a CEO knows damn well the pensions are worthless paper.
Top management mismanages and generally screws up a company to the point of bankruptcy, and then skips out with a huge multi-million $ bonus package. The employees who were promised a pension get the shaft while he gets millions for screwing them out of it.
LOL!!! - You win "Post of the Day" !!!
I'm watching the Frontline show over the internet right now - They're talking about the United debacle - this is awful. The banks were first in line and got all their money back plus interest an FEES - one law firm made 100 million in fees alone ...
Actually I think the demise of defined-benefit retirement plans is one of the few significant roll-backs of socialism in the U.S. in my lifetime. It's unfortunate that some hard-working retirees will get screwed, but in long run it's much for our society. When people get the notion upon first entering the work world that somebody else will take responsibility for their long-term financial security, that's a huge step down towards sheephood.
I think the PBGC will do decent bailouts of the companies that actually need it. But for financially healthy companies like Exxon, Pfizer, and P&G, "underfunding" is just a regulatory classification, and in no way implies that retirees actually won't get their checks. When push comes to shove, the PBGC will push a company into bankruptcy/liquidation before bailing out its pension fund. Believe me, if they started liquidating Exxon's assets right now, there would be plenty to pay all the contractual retirement obligations. The shareholders would get screwed, but a big part of the purpose of these "underfunded" classifications is to give shareholders an early warning system; if the problem is really serious, shareholders will start bailing, share price will plummet, and executives' big share-price-tied bonuses will shrivel up like raisins, triggering a financial clean-up. One of the most important financial clean-ups is to stop offering a defined benefit retirement plan to new employees, to start phasing it out.
the rest of us are just fodder...
only good thing is because we private employees will have no money all those teachers and federal workers etc will be footing more and more of the tax burden.....
I think they do it on purpose just to throw the pensions out....
research Charles Hurwitz and how he dragged Kaiser Aluminum down the tubes then sent all the pensions and medical benefits down with it.....
I think it's going to be a black Friday.
Now, I understand why firms like Ford and GM (Great Mismanagement?) are there. It is quite obvious really. And I'll go ahead and ignore most of the other firms listed. My question then is as follows: Why in blazes is Exxon on that list?
Aren't they pulling in more profit than barn cats nab mice? What gives? Seriously.
And there ends my stupid question of the day.
>The answer is, there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It's the end of retirement.<
"Retirement" in fact is an anomalous state. Over most of American history, Americans haven't 'retired' because they couldn't. There was a generation or two that did retire when pensions still existed, but that's gone for most of the people 'retiring' now.
It's going to get interesting. A lot of people are depending on the value of their houses to feed them, and some even have illusions of living decently. Won't happen for many of us; between the present housing price decline, as the boomers try to cash in in ever-increasing numbers there just are not the warm bodies around to buy those houses, and the people who have money--the one's whose earnings have not been completely degraded by the influx of illegals slashing the price of labor--will be relatively few, but they will own McMansions at deeply discounted prices.
But wait! It gets worse. People who want to keep working just because they want to find out soon enough that American business doesn't want them after 45 or so--they're throwaways. Increasingly, as people must work for life, watch for highly skilled, highly trained, highly competent and motivated people in fields that do not lend themselves to consultancies or small business to work for very small dollars indeed, IF they can convince someone to hire them to do anything at all. [& I expect smug souls who imagine themselves immune to such surprises to crow about how this would NEVER befall them, but never say never. We all have targets on our economic backs in some fashion. You don't have to be lazy, stupid, unambitious or short-sighted to find your life seriously derailed in short order. This happens daily to a lot of people who have played by the rules and who in fact worked hard and lived prudently, people who never anticipated being kicked to the side.]
Who benefits? The people at the top of the food chain, the very apex--for a while. When Americans have largely been reduced to peasantry, they won't be able to buy the products, and the whole system goes into a serious meltdown.
It's all really too bad, because it is driven by short-sighted greed. If manufacturing had not been sent overseas, things could have continued as they were, but very shortly, we're about to discover that we cannot make nearly the same incomes flipping burgers for each other. The 'service' economy goes belly up when people cannot afford to pay for those services. When it all melts down, the corporate slugs with the big paychecks and bonuses will find that their take isn't worth what they thought, either, as the value of the dollar inevitably crashes and burns, but they probably won't be left living on ramen noodles, cat food (or cats), and going without medical or dental care.
One thing about 401(k) plans is that they can't take it away from you. With a pension when you die it's gone, unless you accept lower payments so you'r spouse can continue to collect something when you're dead. A 401(k) is part of your estate and passes on to your survivors.
One thing I would like to see changed in 401(k)s concerns matching funds. A lot of companies match 401(k) contributions with company stock, and a lot won't let you convert that stock into other investment options. Over time you have an excessive percentage of your savings in a single company, and if that stock tanks then a good percentage of your savings tank with it. I'd like to see a regulation allowing you to convert matching stock to some more diversified investment.
And yet, Exxon could do only one thing with their excess cash! Buy back $32 Billion of their stock, at the highest market price in its history.
Disgusting, but Fatso got his slice, so the hell with everyone else!
The concept of a defined-benefit pension is -- and damn well should be -- becoming a dinosaur in today's world. Most of these companies are under tremendous strain because of the burden on their cash flow related to pension and medical benefits to people who no longer work for them -- and in some cases haven't worked for them in decades. That's a business model that is certainly doomed to fail.
LOL! Ford and GM are understandable give the UAW (U Ain't Workin').
Now if we could apply the same rules to the government sector .....
Until the merger with Hughes, Raytheon's retirement fund had been maintained on a sound actuarial basis since the 1920's, long before federal oversight. (Actually before the merger, or aquistion, Raytheon had $2,000,000,000 cash in the bank, exclusive of it's retirement fund.) When Raytheon bought Hughes from General Motors, they took on a large chunk of GM's debt and liabilities, most unrelated to operations at Hughes, including the underfunded Hughes pension plan. I believe they they maintain separate pension plans for legacy Hughes and legacy Raytheon employees.
I know a lot of former EXXON hard-hat employees who are millionaires because they took advantage of the company stock options and when they die, their kids become millionaires.
ping
Toiday's corporate CEO tends to be a super-greedy manipulator who cares nothung for his workers or nation.The 1980s ushered in an era of me-ism under the mantra of deregulation.And even more regulations enforcwd against the little guy.
You know I'd like to make mention of another example of the brilliance of the Reagan Administration. It was Reagan that gave America the 401K plan. SS is a politician's promise and pension is an employer’s promise. A 401K is mine.
"Big Business" for the most part has no more integrity than Big Government. The one huge difference between them is that most people can refuse to do work for a big company and can refuse to do business with a big company. We don't have that option with government.
Retirement always has been the sole responsibility of the individual. Geez. When did people get so dependant? Don't answer that.
There are some great books out there on this topic and the things that stick out are:
1. Don't live above your means (having a hard time with this one)
2. Put AT LEAST 10% of salary into a 401k or whatever personal investment program the employer has
3. Open an IRA and treat it like an expense
4. Stick to this like glue.
So, there aren't as many shopping trips, fishing trips, whatever, but there will be less worries about paying rent when the time comes.
My pension plan carries a lump-sum option. There is no way in hell I'm not leaving with that lump sum when I retire. Anyone who gambles with the monthly payments is crazy. I'd rather take my chances making the lump sum last through my retirement than get a letter telling me, "We're broke. Your pension payments will cease."
I'd reserve the socialist designation for what's forced upon us by government but otherwise agree with you.
For me, the worst effect of a defined-benefit plan was to tie me to the company. To leave, for an iffy future elsewhere, would have meant effectively sacrificing most of my accrued retirement benefits. Knowing few people would make that sacrifice allowed the company to avoid making some reforms it desperately needed to make.
All of the ills of socialism regardless of designation.
The company went outside for a CEO who would make needed changes and it did go to a defined-contribution plan.
My plan had that same option. When I left the company after 22 years to go into business for myself I found that even allowing for inflation the lump sum I thought I had been promised was only a small fraction of the amount that had been projected some 20-odd years before. The pension fund committee's administrators had plowed our pension funds back into company stock trying to keep the stock prices up in the face of the Jimmah Cahttuh economic debacle, stock which the committee members held in large amounts btw, and when those prices collapsed the fund was almost depleted.
I always thought that the government oversaw the operation of pension funds and that they were more or less guaranteed, but I learned the hard way that nothing is guaranteed when it comes time to fish or cut bait. Given my family's less than satisfactory experiences with company pension plans, I would not place much importance on the pension policy of any company I was considering applying to if I was entering the job market today.
How can we expect the government to oversee pensions funds of coporations when they manage the largest unfunded pension plan known to exist?
This is a huge travesty they have heaped on the American people and most likely, todays young people will be stuck with an enormous bill. Instead of running for re-election, this Congress should resign in disgrace after the last couple of budgets they have passed.
(Denny Crane: "Every one should carry a gun strapped to their waist. We need more - not less guns.")
That is a elegantly true statement. Anyone who is under 50 who plans on SSI as part of their retirement is a fool. Anyone who has a pension that is not from a governmental entity as part of their retirement plan is whistling past the graveyard.
I have a pension from the State of California. Neither that nor SSI are part of my retirement plan.
"Retirement" in fact is an anomalous state. Over most of American history, Americans haven't 'retired' because they couldn't. There was a generation or two that did retire when pensions still existed, but that's gone for most of the people 'retiring' now.
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I agree with much of your post, but I believe there once was a "retirement" system that worked for most people. It involved multiple generations working the same farm and living together in one large house or multiple houses. You can go to Lancaster, Pennsylvania now and see the "three generation" houses. Those who were too old to work full time did whatever small chores they could until they were too old to do anything and the younger generations took care of them. This way of life is pretty much dead and buried but what many have failed to realize is that the only real change is that the older generations COLLECTIVELY are now dependent on the younger genereations COLLECTIVELY rather than on a single family basis. All the 401K plans that can be conceived will not change this fact. The only possible way to change it is to develop robots that can do the full range of human labor.
"Toiday's corporate CEO tends to be a super-greedy manipulator who cares nothung for his workers or nation.The 1980s ushered in an era of me-ism under the mantra of deregulation.And even more regulations enforcwd against the little guy."
You will be under attack shortly by the GordonGekko admirers.
There are a lot of folks who claim that the free market will keep these companies honest -- though it's increasingly obvious that that belief is not well-founded.
It brings up the questions of why we should believe that the people involved in running "corporate enterprise" are any more honest or moral than those involved in "government enterprise," and why we should expect much difference in how the two enterprises operate.
The question becomes more interesting when the coroporation in question becomes so large as to be insulated from the market forces that free-market people like to claim will moderate the actions of those companies.
The fact is that really big corporations can to a large degree create their own market forces. If a rival is causing them business troubles, they can adjust; but the can (and very often do) remove the problem by buying the rival company. Large corporations also have the money and time to lobby the government for a variety of self-interest deals -- and they can afford to buy politicians, as well.
And, interestingly, really big corporations are very often successfully lobbied by the same folks who've been successful in lobbying the government -- the greens, race pimps, the homosexual lobby, unions, and so on....
This "pension debt" issue is really not much different from the Social Security deficit. And the actions of large coroporations are really not much different from that of the government.
I strongly disagree. A properly funded defined benefit program is one of the best examples of capitalism. I entered the Austin Fire Department in 1979. I contributed 14% of my income to a benefit plan. I was not in Social Security. The city matched this, which meant 30% of my compensation for being a firefighter was my pension. The pension fund was a private business, and the pension contributions went directly to an investment portfolio. The defined benefit was tied to (a) the individual's investment in the fund and (b) the performance of the fund portfolio. These properly run private pensions have been so successful that every time Social Security gets in a bind, they look at taking them over. The last time I checked, our fund had something like an average of over $200,000 in value for every member (that includes people who just signed up and have been contributing for less than three or four years).
These companies are not legally required to run a pension fund. They can let people get social security and pay them straight salary. The problem is that they are creating future liabilities without creating any funding vehicle for them, kind of like taking out a loan without making any provisions to pay it back. I think that many CEOs today are hit and run managers, who want quick profits and dividends at the expense of the long-term health of the company. They get a big payoff for immediate results, and intend to be down the road when the bills come due. It seems to me that their are some accounting shenanigans going on with Exxon, etc. on the pensions. Of course, many of these plans were set up years ago, so blaming the current CEOs may not be appropriate, but companies like Exxon should start cleaning up these messes NOW. It may be too late for GM and Ford.
A properly run pension fund is the most capitalistic thing in the world.
>You know I'd like to make mention of another example of the brilliance of the Reagan Administration. It was Reagan that gave America the 401K plan. SS is a politician's promise and pension is an employer’s promise. A 401K is mine.<
Life has no guarantees,as I am well aware, but the flaw of the 401Ks is that their value will implode when the economy is finally destroyed by the excesses of outsourcing. I've put away a large pile of money, at maximum allowed levels, but that won't do one a shred of good if the dollar becomes nearly worthless.
Be prepared to work. While doing genealogical research, I found an occupation listing in a city directory for my then 90-something great-grandfather circa 1900: laborer.
>It involved multiple generations working the same farm and living together in one large house or multiple houses. <
Even if we could all go back to a rural life, families, even intact ones are so much smaller that this kind of support system would not work well. Three generations in one house today, with a widowed grandmother, her married son, his wife, and their teenage daughter--is only 4 people, for example.
Outside of a rural life, which does allow barter and growing large gardens, extended families under one roof do not work so well.
We will all probably have to work forever anyway because we'll need health insurance.
What the hell is going on in this country? Hello? George? Or is it Jorge? This is nuts? We are headed for some serious social unrest if this kind of stuff continues.
Never meant to suggest that we could go back to it, only to say that there was a "retirement" system of sorts in this lifestyle. Your comments about family size only serve to illustrate my point that older generations are dependent on the younger ones regardless of 401K or whatever, unless we can develop robots to do the work demographics will put us in a hole. I have often imagined what it would be like if my wife and I were the only ones left alive. We would own everything by default but would have nothing except what our own physical efforts could provide. Once we became too feeble to provide for our own needs we would die in the midst of plenty. Robots are the only answer of which I can conceive that will allow people to live well in retirement. Demographics are totally against the current system.
That's not a "defined benefit" plan. "Defined benefit" refers to pension plans that guarantee a particular dollar amount in pension payments, regardless of how the underlying investments perform. And that is precisely what causes the chronic "underfunding", which results from a mismatch between the legally prescribed calculation of the future benefits to be paid and funding level which that is legally defined as requiring, versus the present dollar amount of assets in the underlying fund. And defined benefit plans don't involve direct contributions from the employee; they are company-paid benefits based on number of years worked, average compensation for a certain number of years (e.g. for the past 5 years of the beneficiary's employment, or the last 10 years). Defined benefit plans have all their assets invested according to the plan manager's decsisions; the beneficiaries don't have a word to say about it. A defined benefit plan gives employees the right to say "I'm entitled", while they have no personal involvement in or personal responsibility for making the money materialize on schedule.
What you have is a "defined contribution" plan and it sounds little different from a 401(k) (which is a defined contribution plan) except that it sounds like you only had one option for how to have your contributions and company matches invested, and perhaps that you don't have any control over the rate at which your benefits will be paid out. 401(k) plans always, as far as I know, offer an assortment of investment options, allowing the employee to decide how much risk to take, and when and how to shift allocations from mostly equity (normally while you're younger) to mostly bonds (normally closer to retirement age). THIS type of retirement plan promotes capitalism, by putting workers in charge of their own capital, both in terms of how much they set aside for retirement, and in terms of how they choose to invest whatever amount they set aside.
There is not necessarily any wrongdoing on the part of a company, when its pension plan is "underfunded". They may have been putting the required amount of money in year after year, using reasonable (and government regulated) projections to determine what that amount is, and then suddenly the markets tank and the plan is "underfunded" (a situation which often corrects itself when the market does its next boom). Also, when an underfunding situation is serious enough that the company urgently neds to put more money into it, that many come at a time when the company is financially stressed (sometimes due to government actions or inactions that affect their business, such as lowering steel tariffs for foreign competitors, eliminating subsidies from an agricultural supplier or from an agricultural company, looking the other way while a competitor cuts costs by employing hordes of illegal aliens, etc.).
As for unionized employees of outfits like GM and Ford, I don't have an ounce of sympathy. Their unions have been strong-arming the companies into paying the workers way above free-market rate wages for decades, decimating the companies' ability to compete with foreign manufacturers.
The defined benefit plans really WERE forced on us by government. Government gave employers big tax breaks for running these plans, such that in most major industries a company couldn't compete effectively without having one. For a long time, there was no tax break for defnied contribution plans, so companies didn't have them, even if both the company and its workers very much wanted to go the defined contribution route. When government coerces private citizens and private businesses into doing things they don't want to do, and not doing things they do want to do, claiming it's "for the greater good", that's socialism.
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