Retirement has taken a back seat to corporate profitability for more than 40 years as the United States has embraced the reduction of pensions, and now the U.S. economy is paying the price with lowered productivity.
Without pensions, older workers are being forced to work longer hours and stay in the workforce longer, and that means they're squeezing out some of the most productive workers of all, known as core workers, according to a study by the University of Paris-Sorbonne.
The study compared workers in three different age groups: younger workers (ages 15-24), core workers (ages 25-54) and older workers (ages 55-64). The percentage of those in the older group who are currently working widened to 61% in 2014, up from 60% in 2004, while the percentage of those in the core group currently working has shrunk to 77% in 2014 from 79% in 2004, according to the Organization for Economic Cooperation and Development (OECD).
On one hand, the U.S. economy has become more productive by pushing older workers into the labor force, along with women and migrants who have also increased their participation in the labor force. However, by doing so the U.S. has also decreased its productivity per worker, the Sorbonne study showed.
Inequality has widened as a result
The drop in U.S. pensions also contributed to the rising gap between the rich and poor, and that inequality led in part to the Great Recession of 2008-2009, said French economist Thomas Piketty at a conference this month in Paris. By eliminating pensions, the U.S. has moved closer to a capitalist economy where companies no longer rely on pensions to attract workers and also don’t have a safety net where companies and workers are taxed to raise money for their pensions, as is the case in most European countries. That change has led to increased inequality, because low- and middle-class workers cannot afford pensions, whereas the wealthy can.
What’s more, by pushing older workers into the labor force, the U.S. economy has taken jobs away from younger workers who could be more productive. Keep in mind this is not to suggest that older workers can’t be as productive as younger workers. Experience and knowledge go a long way. But when taken across the entire U.S. economy, older workers tend to be less productive on average, according to the study at the Sorbonne. Globally, the peak average age for workers in terms of their productivity tends to be about 43.
Riding on the coattails of abuses by several public and private pension plans, the Employee Retirement Income Security Act (ERISA) was sold to the American public in 1974 as a way of protecting people’s pensions by ensuring that they would be made secure and backed by the federal government.
It worked, but not as the American public thought it would. It did protect pensions, but it also made them costlier for employers. As soon as the ink was dry on ERISA, Corporate America began eliminating pensions from its balance sheets. From 1980 through 2015, the proportion of private wage and salary workers participating in defined benefit pension plans fell from 38% to 15%, according to the U.S. Bureau of Labor Statistics. DB plans are the traditional pension plans that your father or grandfather’s generation were accustomed to, but now they’re as rare as a gold watch at retirement.
The U.S. government later created the 401(k) in 1978, but it was never expected to support workers through retirement. It has been embraced by corporations as a way to attract workers by having the workers pay for their own retirement, thus eliminating pensions from corporate balance sheets. Also, by eliminating pensions, corporations no longer needed the voice of workers at the bargaining table.
What has the effect been on retirees?
Currently, about 43% of private workers take part in their 401(k) or other defined contribution plan, according to the U.S. BLS. That isn’t enough to support most of the retirees throughout their retirement. Through the end of 2015, the average 401(k) balance at Fidelity Investments, one of the country’s biggest 401(k) providers, was just $91,300 — a paltry amount compared with what experts say you would need to save for retirement.
Below is a graph that shows how little the U.S. has saved for pensions when compared with other countries:
So is the answer just to keep working and save more in your 401(k) and hope for the best? Or does the answer require a broader perspective, bringing government, corporations and workers together to look at ways of either resurrecting pensions or creating legislation that requires companies to contribute more to employees’ 401(k)s?
Washington seems too worried about saving Social Security and Medicare to be concerned with the much broader issue of saving pensions. That leaves U.S. corporations and workers to solve the issue themselves.
Michael Molinski is an economist and writer, currently pursuing a Master in Economics at the University of Paris-Sorbonne. He is a former retirement editor at Fidelity Investments and a former journalist at MarketWatch and Bloomberg.