They don’t make pensions like they used to

The nonpartisan, nonprofit Employee Benefit Research Institute recently revealed that 40 percent of employees have less than $10,000 in their 401(k) retirement accounts. Shortly thereafter, the criticism of these programs began to pour in. Many of the critics called for the return of traditional pensions, which would shift the responsibility of retirement income from the employee to corporate America.

The EBRI data isn’t the only source of statistics that support the notion that too many American workers are not saving enough on their own. I’ve read articles in several business and financial publications that have issued the same warning.

Nonetheless, I don’t believe a return to the traditional pension is in the cards. Nor do I believe such a move would ultimately be a viable alternative.

It’s not that I’m anti-pension; it’s just that times have changed. For example, years ago people often spent their entire career working for just one employer. Not anymore.

Today’s workers are far more mobile than their parents. The way so many people hop from job to job, I believe very few would actually remain anywhere long enough to become vested in an employee-sponsored pension. One of the original ideas behind pensions, after all, was to reward long-term employees.

Those 401(k) critics who called for the return to traditional pensions often failed to mention that many pension plans couldn’t meet their obligations. Did it help when their liabilities were turned over to the Pension Benefit Guaranty Corporation? No, because the PBGC has its own financial issues.

Why did so many pension plans fail? There a number of reasons. Poor investment decisions by the pension fund managers were very likely among them. Another factor was that too many plans over promised. In many negotiated settlements that entailed bargaining, unrealistic results were agreed upon. Extended life expectancies also contributed to the failure of so many pensions.

In other words, although pensions sound nice, you have to keep in mind that they have problems as well. Detroit workers and retirees alike recently saw their pensions reduced. But they could be thankful they don’t live in Chicago, which has a pension liability that’s absolutely staggering. Not to mention several other government pension plans that are approaching the crisis level.

So if both pensions and 401(k) programs have issues, what’s the solution? Well, I don’t think it’s anything that can be legislated. What we need, in my opinion, is education on how to plan for retirement.

I do understand that it’s difficult to think about saving when you’re living paycheck to paycheck. But too many who are beyond that still fail to save. Unfortunately, saving for retirement is something many do only if there’s ever any extra money. Even then, much of that extra money is spent on a “deserved” or an adult toy that costs “just” a couple hundred dollars per month.

In other words, bad choices and impulsive decisions are reasons why some will never have enough money set aside. Saving and investing cannot compete with short-term gratification. That’s why financial education is so critical.

In this world, which I often refer to as YOYO (you’re on your own), parents and educators need to lead by example. They must teach the importance of financial discipline, investing and long-term saving.