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Bigger than just Social Security
June 22nd 02:19:44 PM
The debate occuring inside the Beltway and all across America over the future of Social Security, is really about something much larger than just Social Security. It is about the fundamental question each and every American must ask themselves: How am I going to ensure that I am financially secure after my working years? For decades, many retirees have depended upon both Social Security and a corporate pension to fund their retirement years. As we enter the 21st century, the likelihood that this route will ensure financial security for America’s seniors is diminishing – quickly.
Not only does Social Security face a funding crisis that will cause our federal deficits to soar in the next few decades, now many corporations are adding to the mounting burden placed upon America’s taxpayers by passing on their pension obligations to the federal government.
Recently, United Airlines went before a bankruptcy in Chicago to seek to hand over more than $6.6 billion dollars of retirement obligations to the federal government. The bankruptcy judge granted their request, and now the pensions of 119,000 current and former union employees of United Airlines will be funded by you and me.
With many corporations overwhelmed by the growing costs of their pension plans, this trend is sure to continue – adding an additional burden to the American taxpayer. Both pension plans and Social Security can be grouped into a broader categorical definition of retirement plans known as defined benefit plans. That is, you pay in a certain amount throughout your working years, and when you retire, you will receive a certain, or defined, amount each month or year. The problem with these plans is that they leave corporations (or in the case of SS, the government) with huge liabilites for years to come. These plans make promises that can’t be kept and both the corporation/government and the retiree are hurt in the long run.
I recent decades there has been a shift towards defined contribution plans, where both the individual and company set aside a defined amount each pay period into an account (usually a diversified mixture of stocks & bonds) where it accumulates over the years and earns a strong return. Examples of these plans are 401(k)s, IRAs, etc. Over the course of one’s career, these accounts will amass hundreds of thousands, if not millions, of dollars, guaranteeing the individual a secure retirement. In addition, the company is left without a liability to pay out after the individual retires.
We have seen the failure of defined benefit plans in both corporate pensions and the Social Security system. Meanwhile, defined contribution plans leave both the employee and corporation in the best position once the individual leaves the company and retires. Additionally, the retiree has a real, tangible asset he/she can pass on to future generations. With the large amount of unfunded liabilities facing Social Security, aren’t private accounts (a defined-contribution plan) the obvious solution?
Posted by Jonathan Swanson
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