Finance

Fear of a Cat-Food Diet: Facing New York’s Retirement Crisis

June 25, 2014
By Steven Wishnia

New York — New York City and the United States are facing a “slow-motion retirement crisis,” says AFL-CIO national policy director Damon Silvers. With employers cutting pensions and middle-aged people sacked in the Great Recession unable to regain their incomes, the traditional “three-legged stool” of pensions, savings, and Social Security has been splintered for millions of people.

It’s simply “unsustainable” to expect the elderly to live solely on the average Social Security payment of $15,000 a year, New York City Central Labor Council president Vincent Alvarez told a conference at the New School June 16—but Social Security is the main source of income for all but the richest 20% of New Yorkers over 65, says James Parrott of the Fiscal Policy Institute.

Scott Stringer

In the city, only 41% of workers get any kind of retirement benefits from their employers—whether a pension that pays a defined monthly benefit or an individual savings scheme like a 401(k) plan—according figures from 2011 compiled by the New School’s Schwartz Center for Economic and Policy Analysis. That amount had dropped from 49% in 2001.

The percentages vary wildly among different occupations. In the heavily unionized public sector, 80% of workers had some kind of retirement plan, and almost one-third had defined-benefit pensions. But in the private sector, only 8% of workers have defined-benefit plans. In construction, two-thirds of workers have no plan at all, and only 5% will get defined-benefit pensions. Among workers making less than $30,000 a year, three-fourths of have no plan, and only 7% will get a pension.

In contrast, Alvarez said, 75% of the city’s union workers have some kind of retirement plan.

“We actually had a pretty decent retirement system, and we’ve systematically taken it apart,” Silvers said.

Since 1980, employers have largely switched from defined-benefit plans to defined-contribution plans such as 401(k)s. These were originally conceived as a way for workers to save money to supplement their pensions, but instead have become a substitute for pensions. This shift, Schwartz Center director Teresa Ghilarducci wrote in 2007, forced workers to shoulder more risk—including the risk that they’ll live longer than the lump sum they get at retirement lasts. “Running out of income is a main reason older retirees are poorer than younger retirees,” she added.

The advantages of defined-benefit plans are “obvious,” says Schwartz Center economist Joelle Saad-Lesler: Workers are guaranteed a certain amount of money every month for the rest of their life. In contrast, defined-contribution plans have to pay high fees, are more vulnerable to market fluctuations, and can’t make long-term investments—with the result that they at best replace about half of a retiree’s paycheck on average.

Defined-contribution plans, however, present a much lower risk for employers. Instead of having to maintain and finance a pension plan, all they have to do is make a small—and often voluntary—contribution to the paychecks of workers who opt in.

Employers have “essentially walked away,” said Silvers. They didn’t want to put 8% of their payroll into a defined-benefit plan, so they switched to defined-contribution plans or nothing.

1980 was the turning point, argues Steven Kreisberg, AFSCME’s director of research and collective bargaining, with the changes of the Reagan era leading to rising economic inequality, declining real wages, weaker unions, and an “incredible political backlash” against labor. Coupled with the rise of low-wage, part-time, and freelance jobs and the effects of the Great Recession, this has also amplified racial inequalities, noted Columbia University political-science professor Dorian Warren.

“We’ve been on the wrong path for 30 years,” Kreisberg said. “The wealthiest among us would have you believe that the pension of a librarian caused the recession.”

June 25, 2014

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