What a Long Strange Trip it's Been
Default lines
For Hardy, the escalating number of companies defaulting on, freezing, dissolving or converting their pension plans doesn't bode well. (According to the Washington Post, more than 20 companies have defaulted on pension funds of more than $100 million in the past three years.)
Hardy points to Enron's 2002 collapse as an example of how hindsight can reveal huge mistakes in workers' investment strategies. Workers were led to believe that investing their pension dollars in company stock was safe, and instead of giving them a chance to salvage their savings, they were among the last to learn the truth.
United Airlines' 2005 default on its $9 billion dollar defined benefit pension obligation is the most recently publicized example of this disturbing trend. "United's 120,000 employees and retirees are all affected by the company's default," says Hardy, "but it is particularly devastating for the older workers, many of whom are 'leading edge' Baby Boomers, because switching to other retirement options will not replace their pensions at the same level; all they can do is slowly rebuild their nest egg, which means they will probably have to retire later than they had planned—perhaps much later."
This breach in trust will inevitably have a larger impact, she continues. "When workers sign on with an employer, they're not signing on for just wage and salary—it's a whole compensation package they're accepting. Research suggests that workers who are able to accept deferred compensation, like a pension plan, are workers who not only are willing to invest in their futures, but also are more likely to invest themselves in the future of the corporation."
Loyalty begets loyalty—"or at least it should," notes Hardy.
Social insecurity
Social Security continues to be one of the pillars of retirement planning. It isn't clear whether it will support the Boomers the way it did their parents, or how the contract will be renegotiated with subsequent generations; it all depends on what kinds of changes are made, Hardy notes.
The first Social Security payroll taxes were collected in 1937—a year in which the ratio of workers paying in to soon-to-be-retirees taking out was 42 to 1. Today that ratio of contributors-to-beneficiaries stands at just over 3:1 and "when youngsters retire," forecasted President Bush in a 2005 speech, "it's going to be 2:1—two workers per beneficiary."
Because Social Security is primarily a pay-as-you-go system, today's workers are paying in not for their own retirement, but to provide for society's current and near future dependents, largely retirees and children. The combined number of people age 65 and older and those under 18 is what's known as the "dependency ratio"—and with the number of Americans over 65 jumping from 35 to 70 million by 2030, there's serious concern about how this shift will affect the solvency of the program.
Now-retired Federal Reserve Chairman Alan Greenspan remarked in 2003 that "Because the baby boomers have not yet started to retire in force and accordingly the ratio of retirees to workers is still relatively low, we are in the midst of a demographic lull." Short of an "outsized acceleration of productivity...or a major expansion of immigration," Greenspan predicted that "the aging of the population now will end this state of relative budget tranquility in about a decade's time."
But Hardy argues that it's not only an issue of the number of workers relative to the number of beneficiaries. The proportion of adults in the labor force has remained fairly constant over the past century, she notes, largely because of increasing employment rates for women. The more relevant change in the dependency ratio, she suggests, is a result of the workforce getting older.
Expected increases in worker productivity and average wages, how the Social Security trust fund is managed, and changes in the structure of contributions and benefits are only some of the factors that will shape the future of Social Security, Hardy adds. In fact, she suggests, one of the most important factors for Social Security may be the return to large deficit spending by the federal government. "Deficit spending, escalating national debt, and the utility of the trust fund are all connected."
While there's no consensus on how this program's crisis will unfold, most concur that responsibility for the future financial security of the so-called Generations X and Y—Boomer offspring—will rest more heavily on the individual.
Next page: "The birth dearth"