Armchair Pundits

Better Take Your Financial Pulse

Inspired by Squirrel's last post, I set out on a fact finding mission in order to add to the discussion. In doing so, I came across an article written by a Retirement Business Strategist for Van Kampen Funds, Thomas Rowley. I greatly enjoyed the article. It is entitled "What You Didn't Hear During The Elections?" I am unable to provide the link so I've enclosed the ariticle in it's entirety.

"Although it is important and overdue, I guess I did not expect a debate on retirement issues during the 2004 election. For any politician, the prospect of large numbers of angry retirees a group that votes at higher levels than other age group is unsettling. However the “three-legged
stool of retirement” Social Security, retirement plans, and personal savings looks a little
wobbly.

The root of the problem is a long-term shift that politicians do not want to face. Why? Because the necessary long-term solutions include unpopular choices. Social Security and pension reform are issues rarely engaged during the political cycle. However, we should talk about it now, before the next excuse comes along.

For Social Security, the problem is twofold
Americans are living longer; and the senior population is growing faster than the number of young workers to cover their needs. That means benefit levels are getting harder to sustain. In October, Federal Reserve Board Chairman Alan Greenspan called for a scale-back in future
Social Security benefits. But let's be realistic. The federal government's belt-tightening is designed to help cover a growing federal budget deficit and this should concern you. However, neither the Republicans nor Democrats have made the reduction of future benefits their campaign cry. Add Social Security issues to deficit pressures, corporate cutbacks and a sobered stock market, and many Americans are unprepared to meet their financial needs in retirement.

Retirement plans, which represent the next leg of our three-legged stool of retirement, are breaking. From the airlines, to the steel industry, to the auto manufacturers, large companies are struggling to meet their obligations to retirees.

In October 2004, United Airlines told a bankruptcy court that it was considering terminating all of its pension plans. Many aviation experts contend that after two years in bankruptcy, and with its finances still precarious, United has no other choice but to default on its pension plan. The competition from low-cost airlines, many of which provide 401(k) plans instead of traditional pensions, has transformed the economics of the aviation industry. The cost of maintaining
defined-benefit pension plans does not make good business sense when you have low-cost carriers entering the market. For airlines, like other industries, the day of the defined-benefit pension plan appears to be over. If United does default on its pension obligations, the default will be the largest in history more than twice the size of the 2002 Bethlehem Steel Corporation default. Once United defaults, other carriers like Delta and US Airways will also have to find a way to dramatically reduce their pension obligations. US Airways, which already has defaulted on its pilots' pension plans during its first trip to bankruptcy court in 2002, has warned
that it may default on others as well. Delta, another airline teetering on the edge of bankruptcy, may have no choice but to follow suit.

A chain-reaction of airline-pension defaults would put additional pressure on the Pension Guaranty Corporation (PBGC), the federal agency that insures traditional pensions in case companies go bankrupt. If other airlines follow, the PBGC may have to go to congress and plead for a bailoutthat some experts say would be bigger than the Savings and Loan debacle of the 1980s.

At least, as of mid-October, it appears the stock marketis climbing it's way out of a three-year tumble and many 401(k) and IRA balances are growing, too. However, we should remember the balances of defined contribution plans (401(k), 403(b), 457, Profit Sharing, SEP and (SIMPLE) and traditional IRAs represent untaxed income. So, as the sign on the rearview mirror says
“objects may appear larger than they really are.” If one of the solutions to Social Security and retirement-plan issues is higher taxes, then your defined contribution plans and IRAs just got smaller. This brings us to the last leg of the three-legged stool: personal savings. As many as 40 percent of Americans have saved almost nothing for retirement.(i)

Simply put: Retirement for U.S. workers just is not what it used to be. Forget the gold watch, the reliable pension and Social Security check for 30 years of service. The impact of demographics, globalization and competition from low-wage companies in low-wage
countries that don't provide benefits has shifted the onus of retirement security from government and businesses to individuals. So, how are you planning for your retirement?

(i) “The 'Retirement Readiness' Crisis in the United States,” Benjamin Stein, honorary
chairperson of the National Retirement Planning Coalition, before the U.S. House of Representatives,House Committee on Education and the Workforce,February 25, 2004. "

As mentioned elsewhere, we have become a country of the entitled. However, those that persist in such a mindset are in for a rude awakening concerning their retirement. The decisions made today effect the quality of life tomorrow. The future rests squarely where it ought to, in each of our capable hands.

posted by Grisby @ 4:17 PM