We all age.
We all have a need to ensure we have the finances to support ourselves in our later years. Yet, over the last several decades, small changes have been happening that have slowly shifted the savings burden over to employees.
The changes in industry, competitive landscapes, and technology have negatively impacted the ability of businesses to continue to fund programs that support employees during retirement. Specifically, two programs have been impacted – pension plans and health care during retirement. In addition, the government-funded social security programs are changing. Each is described below.
Employer Funded Pension Plans
The first private employer pension plan was established in the US in 1875. Over the last 150 years, the plans have changed, legislation and government departments were established to monitor, and millions of employees have moved into retirement with companies providing monthly pension checks.
These programs were called Defined Benefit Plans. The program is employer funded and provides the worker with a specific retirement benefit that is often referred to as a pension. In the early 1980’s, 60% of employees had a pension plan which provided great incentive to remain at the company for many (typically 30) years. Today, that 60% number has dropped to 4%. (Source: CNN Money).
This shift in burden is the topic of a 2019 research paper titled “The Impact of Decreasing Defined Benefit Plans on Employee Turnover”. While this study couldn’t show a direct link between the plans and turnover, there was enough directional information to suggest more studies are needed.
“By transitioning from defined benefit plans to defined contribution plans, companies are shifting the financial risk associated with saving for retirement onto the employee.”
An interesting analysis was done by WTW in 2019. The article is full of facts and charts. However, the one below was compelling to me. They looked at Fortune 500 companies and compared DB (direct benefit – pension) and DC (direct contribution 401K/Roth IRA) and the changes from 1998-2019.
The chart shows that 60% had DB programs in 1998. Since then, only 8.3% of those companies still have that program. Most froze, closed, or terminated the direct benefit, pension program. Shifting the burden to employees to cover via direct contribution plans.
Employee Health Care in Retirement
In addition to the employer benefit pension plans disappearing, employers are also removing the benefit of retiree health care.
The number of large employers with retirement health care benefits has dropped from 66% in 1988 to 21% in 2023 according to a KFF Study. What this means is that for those over 65 there is no prior-employer support for retirees to supplement the Medicare program that covers roughly 55% of costs.
For those who retire before they turn 65, there is no benefits coverage at all. Without support from pre-retirement employers, individuals are piecing together their own health care plans via the Marketplace.
Social Security Changes
Another dimension shifting retirement ages higher is the increase in age required to have access to full social security benefits. In 1983, the age of full social security benefits rose from 65 to 67 for anyone born after 1960.
While those affected by the new social security age are just turning 62, many of these individuals still have both employers provided pensions and retirement health care. We won’t see the full impact of these policy changes combined with the employer changes for another 10-20 years.
Age of Retirement on the Rise
With extended lifespans and all the changes in pensions, health care, and social security, the average age of retirement continues to rise.
According to Gallup research, in 2022 the average age of those retiring was 61 and the age when the rest of the population anticipated they would retire was 66.
This Forbes article highlights other demographic shifts that are becoming challenging. We are reaching a moment when
Summary – Shift of Burden
All the changes companies and the government have made surrounding retirement have shifted the primary burden from employers/government to employees.
The challenge is that the individual employee isn’t trained to understand retirement implications until they are reaching an age they want to retire. Which is too late.
Your Turn
Have you personally seen the shifts in your company?
Will you have an employer-funded pension, or will you need to save on your own?
Do the new social security retirement ages align with when you would like to retire?