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The universal replacement to the pension, by the consensus of the Bush Administration, Congress, Wall Street and corporate America, is the ubiquitous 401(k). As Bush explained at a gathering at Auburn University in Montgomery, Ala., earlier this year, "When I was young, I didn't know anything about 401(k)s because I don't think they existed. Defined-benefit plans were the main source of retirement. Now they've got what they call defined-contribution plans. Workers are taking aside some of their own money and watching it grow through safe and secure investments."
Tell that "safe and secure" part to the folks at Enron, who lost $1 billion in their 401(k)s. Or WorldCom employees, who also lost $1 billion. Or Kmart employees, who lost at least $100 million. Welcome to the 21st century version of Studebaker.
Truth to tell, the 401(k) was never intended as a retirement plan. It evolved out of a tax break that Congress awarded to corporate executives in 1978, allowing them to defer part of their salaries and cut their tax bills. At the time, federal income-tax rates were much higher for upper-income individuals--the top rate was 70%. (Today it's half that.) It wasn't until several years later that companies began to make 401(k)s available to most employees. Even then, the idea was to encourage saving and provide a tax shelter, not to substitute the plans for pensions. By 1985, assets in 401(k)s had risen to $91 billion, as more companies adopted plans. Still, the amount was only about one-tenth that in guaranteed pensions.
All that changed as corporations discovered they could improve their bottom lines by shifting workers out of costly defined-benefit plans and into much cheaper (for companies) and more risky (for workers) uninsured 401(k)s. In effect, employees took a hefty pay cut and barely seemed to notice. Lawmakers and supporters advocated the move by pointing to a changing economy in which employees switch jobs frequently. They maintained that because defined-benefit plans are based on length of service and an average of salaries over the last few years of work, they don't meet today's needs. But Congress could have revised the rules and made the plans portable over a working life, just like a 401(k), and retained the guarantee of a fixed retirement amount, just like corporations do for their executives.
As it is, 401(k) portability often impedes efforts to save for retirement. As today's job hoppers move from one employer to another, most succumb to the temptation to cash out their 401(k)s and spend the money, a practice hardly reflective of a serious retirement system. Today $2 trillion is invested in those accounts. But to understand why the 401(k) is no substitute for a defined-benefit pension, look beneath that big number. Earlier this year the airwaves crackled with announcements that the value of the average 401(k) had climbed to $61,000 in 2004. Noticeably absent from many accounts was any reference to the median value, a more accurate indicator of the health of America's retirement system. That number was $17,909, meaning half held less, half more. Nearly 1 in 4 accounts had a balance of less than $5,000.