Getting Back to Guarantees

Americans are becoming increasingly responsible for the challenging task of funding their own retirement.

In 1975, 43 percent of corporate employees were covered by a traditional pension, according to the Employee Benefit Research Institute. By 2000, that proportion had dropped to 20 percent.

Today, it seems that even fewer companies are offering pension benefits to their employees. To allow companies to reduce or remove pension obligations from their balance sheets, the government passed the Economic Recovery and Tax Act (ERTA) in 1981. This allowed companies to replace defined benefit pension plans with defined contribution plans such as 401(k) plans.

Defined benefit plans require companies to contribute a certain amount of money on behalf of employees to provide a future defined benefit for the employee during retirement, thereby leaving the financial responsibility on the employer to fund and meet their employees’ retirement needs.

A defined contribution plan (i.e. 401(k)) does not burden the employer with the guarantees of a defined benefit plan and instead shifts the responsibility to their employees.

Because few employers now offer guaranteed retirement income plans, it seems that many individuals are now relying on the government-funded Social Security to meet all or a portion of their retirement needs.  This is a program that was established on the premise that there would be a reasonable ratio of retirees (beneficiaries) to contributing employees. However, it has become apparent that with the disproportionate number of the baby boomer generation, the ratio of contributors to recipients has raised concerns about the ongoing sustainability of Social Security for future generations.

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