The Stunning Failure of the Contribution Pension Plan

Ask any Millennial what they’ll live on when they retire, and they’ll look at you with a blank stare. First off, they are young (oldest are 35), so age 65 seems a lifetime away. Secondly, most of them are occupied with just getting by, an outcome of living in the gig economy, in which saving is unlikely. And we (the Silent generation and older Boomers), were like that too—someone out there would look out for us, things would turn out. Furthermore, most of them are convinced that retirement with a pension is a thing of the past.

They could be right—a guaranteed pension used to be the expectation not so long ago. But after 2000, pension systems began to erode, —and now a funded retirement is more the exception than the rule. It’s ironic that this worldwide trend has appeared just as life expectancy is increasing.

A look at Life Expectancy

In the US:

Over the course of the 24 years spanned by this study, life expectancy increased by 5.3 years nationwide, from 73.8 to 79.1. Women (whose lifespan increased from 77.5 to 81.5) lived longer than men, but both sexes saw improvements.

In Canada:

Canadian provinces, British Columbia (82.2 years) and Ontario score “A” grades on life expectancy, placing them among the top five.

Other Countries:

Switzerland, Japan, and France led the world in this 2011 study, Switzerland (82.8 years) and Japan (82.7 years).

These are wonderful statistics, and will only improve. The question now is, how will this long retirement be funded?

A look at some pension plans:

Revisiting the Defined Benefits Plan (for old time’s sake)

If the plan is a DB Plan, upon retiring employees will receive the specified monthly amount for the rest of their lives. These plans usually allow for inflation, and continue to their spouse or common law partner after they die. These plans are guaranteed, and recipients need never be concerned with the status of their investments.

The Defined Contribution Plan, the employee, not the employer takes the risk. If they have been part of a DC Plan, at retirement they will receive all of the funds which they have contributed, those which their employer has contributed, as well as all accumulated investment income. But at retirement, everything changes.

The employee can choose to transfer the DC Plan funds to a locked-in RRSP, a Life Income Fund (LIF) or an annuity, the important issue being that they will be managing their own asset allocation, and the employer will no longer be involved. Income is based on how the investments perform, and is not guaranteed.

In the past, (1992), 85% of people with a pension were DB Plan members while 15% had Defined Contribution or other types of plans. The percent covered by DB Plans fell to 77% by 2008, and rose to 23% for DC Plans. While the public sector coverage has not changed very much, the private sector shows a significant shift towards Defined Contribution Plans.

Corporate America and financial innovators, notably proponents of mutual fund 401(k) industries, are behind the three decades move from DB to DC pensions. They have pressured employees to save thousands, even millions—witness the laughable 1980s slogan, “Freedom 55”.

Defined contribution plans have failed.

Today, many Boomers facing the end of their work lives do not have enough saved, and are at the risk of having an inadequate retirement, or not being able to retire at all.

This stunning development has happened fast, and has taken us all by surprise.

Barbara A. Friedberg, writing for Investopedia, says this:

“Boomers born between 1946 and 1964, are heading into retirement in droves (about 10,000 a day, in fact). Along with the aging of this iconic cohort come lots of data about their poor preparation for their later years. Insufficient preparedness and lack of financial resources for decades without steady employment paint a gloomy picture for many retirees.”

Are things any better worldwide?

Space in this article does not allow a comprehensive analysis of pension systems worldwide. But the respected 2014 Melbourne Mercer Global Pension Index might at least give us an idea of how various countries rank in pension quality. The Index compared the pension systems of 25 countries across the Americas, Europe and the Asia-Pacific, based on each system’s adequacy, sustainability and integrity.

In this study, Australia, Switzerland, Netherlands, Sweden and Canada ranked highest.The United States ranked 57.9 putting it in 13th place out of 25 countries, below Ireland and above France.

Retirees in countries placing lower in the scale will be vulnerable, and will most likely have inadequate incomes. It is no wonder Generation X is losing hope of a plausible retirement, and Millennials believe they may not be able to retire at all.

What can retirees do now?

The alternatives to a guaranteed or otherwise adequate retirement pension are few, and include

1. contracting out to your old job

2. finding a new, usually lower paying job

3. joining the ranks of the entrepreneurs

4. living on your savings until old age benefits kick in

I suspect that the feelings about all of these alternatives are ambivalent at best, although the following links present a more positive picture:

All of society will feel the sting when older people aren’t able to retire with dignity and security.

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26 Responses to The Stunning Failure of the Contribution Pension Plan

  1. Rummuser says:

    My pension comes from a contributory pension scheme called Superannuation Scheme here. This is essentially for non Government employees in the private sector and the contributions went into a Life Insurance company called the Life Insurance Corporation of India, a behemoth. The corpus will revert to my heirs when I die but till then, the monthly annuity is automatically transferred into my bank account. Government and other public sector employees are covered by the government pension funds and their stories are even better. The problem is that all of us form a minority in India and the vast majority have to depend on family support in their old age. The Indian culture allows for this and in a way is quite successful though one does hear of aberrations.

    Having given that background, I went back to work after retirement on contract basis on three different occasions and also set up my own agency business till I got quite fed up and wound it up two years ago.

    I am now comfortably off with my pension and live with my son and his lovely wife and enjoy both worlds.

    • Still the Lucky Few says:

      You are one of the ‘lucky ones’ Rummuser! I know that families in India are very supportive of all relatives, elders included. We really don’t have that mindset here. It’s more like, ‘every man for himself’, or ‘I’m alright, Jack’. In Canada, there is growing awareness of the Guaranteed Basic Income (which I’ve been addressing), but we have a long way to go!

  2. I think I knew about most of what you’ve presented, but seeing it all in one place is sobering. I was the “victim” of a defined contribution plan, which was “sold” to us state employee professors in the early 1990s as kind of a threat: you’d better do this now while it’s your choice, because who knows what the state legislators will do next year? So I and thousands of others switched our 403b plans to DC. This meant that we gave up on our guaranteed pensions, as you pointed out. I didn’t realize what that meant at the time, 26 years ago. But I do now.

    Thanks for bringing this up.


    • Still the Lucky Few says:

      Oh, what a tough choice you had! Corporations and public agencies have been hard at work these past few years, trying to shed what they see as a ‘burden’ of pensions for the elderly. In the US, it’s distressing to hear the term ‘entitlement’ being tossed around, and used against citizens. We couch it in gentler language in Canada, but right wing forces here are just as determined to cut back on financial obligations for the poor and elderly.

  3. Mary says:

    I have a DB Plan passed on to me after my husband died, although somewhat reduced. But if that company were to go bankrupt, then what would happen? I know there is some sort of guarantee benefit plan through the government. But I think it would be greatly reduced. Don’t really know.

    • Still the Lucky Few says:

      I think (I hope), any DB plan would be backed up by the government. That will require more research, which I will be doing in time. Meanwhile, enjoy your pension—you are one of the lucky few!

    • Andy and I have DB plans and I think they’re partially insured, but not the whole amount. We’ve been retired for almost 24 years now, and if the plan goes belly up we probably have enough savings to keep us going until we shuffle off. That will no doubt be long before another 24 years goes zipping by!

      • Still the Lucky Few says:

        Although I can’t swear (100%) that all DB plans are secure, you will most likely have your income arrive safe and sound as long as you need it! LOL

  4. aunt beulah says:

    When I went into teaching, wise folks said two things “Oh, Janet, you could be so much more,” ignoring my oft-repeated statement that teaching is what I wanted to do with all my heart; and/or “You’ll never make much money,” which, as you pointed out, being young I didn’t pay much attention to. I enjoyed every year I taught, and now I am enjoying my defined benefits as well as social security and other savings realized from summer jobs and consulting after retirement. Whew!!

    • Still the Lucky Few says:

      Your experience illustrates just how magical it is to follow your heart! Fortunately, the DB pension is still available to today’s teachers. And fortunately, young people are still attracted to the teaching profession, in spite of how very much more difficult their job is now!

  5. worzeloddii says:

    In a year I turn 60, and hope to only work three days a week, to write full time. I think life over longevity…

    • Still the Lucky Few says:

      Choosing ‘Life’ over everything else, is wise. When you make that choice, longevity often comes with it! I’ll congratulate you in advance on your forthcoming 60th birthday!

  6. Joe Wasylyk says:

    Hi Diane! Thanks very much for your support. We’re all in this financial quagmire together. If we don’t make our voices heard we will probably get stepped on by all levels of government and unscrupulous financial advisers. In Canada the writing was on the wall when the previous Prime Minister, Stephen Harper said that we the people should be responsible for our own retirement plan financing. Well we still see public service employees (with full-time jobs) and all politicians not willing to sacrifice their own highest in the land Direct Benefits. And what is more shocking these public service entitlements kick in with a minimum of six years of service. Today many younger people have the opportunity of having some kind of a plan for Direct Contributions however; how many of them stay in one job long enough for these pension plans to accumulate in value?

    If education is a basic human right I think now is the time to demand real financial education and financial literacy in areas such as: personal money management, entrepreneurial finances (if you plan to startup a small business or maybe become a seniorpreneur- 50+ entrepreneur) and personal financial planning.

    • Still the Lucky Few says:

      I’m often stung by the irony that the same government advisers that preached about everyone needing to be responsible for their own retirement had the DB tucked securely in their back pocket! I think an entire generation (especially Gen X) has suffered as a result. And your point about the effects of mobility on contribution plans is well taken, although sticking with the same financial institution should offer some safeguards. And yes, we need a lot more education in financial planning.Thanks, Joe, I always value your advice.

  7. ann oxrieder says:

    It drives me crazy that Republicans in the U.S. are always proposing that health care and retirement can be paid for by individuals setting up their own accounts. As if…

    • Still the Lucky Few says:

      It is so risky. Why would anyone think that an area of expertise, which takes years of education, can be pulled out of thin air when we need to make decisions related to something as important as retirement? It’s just not wise.

  8. I’m in a totally different society of retirement – funds and all – in New Zealand.

    My case is probably not the norm (I’m not fit/well but I’m not about to pop my cogs, long term issues), I do not own anything other than a few sticks of domestic furniture, I rent privately, I’m a collector of the gov’t pension – I supposed to have very few sticks in the $-fire – and I don’t have too many, but I seem to be doing alright…as I’m not a big spender etc.

  9. Lynne Spreen says:

    Another reason why ageism in the workplace is so stupid. How many of us olders would love to continue working (and supporting ourselves) as a supplement to often-meager pensions, but we’re thrown out and not rehired even for parttime work. Then we’re accused of sitting on our behinds. Just so stupid.

  10. Maggie Turner says:

    I have no savings, having raised two children on my own in a hostile environment, and have no pension. I have known for a very long time that I was below the poverty line, and will sink further as time goes by. It isn’t something I spend much time thinking about, and discussing it with those who have experienced good fortune (not good planning, I did that, but when you start with nothing, and someone is actively trying to destroy you, you aren’t going to go far no matter how hard you try), because the general attitude from those people is condescending at times, occasionally judgemental, and spending time with them involves spending money I don’t have.

    We have learned to live SMALL, small everything, seek out used items when we are in need, never buy prepared food, and count ourselves lucky that we have heat in winter, decent food and shelter. Consumerism is just a thing we see other people indulging in.

    • Still the Lucky Few says:

      I have great admiration for your resourcefulness and positive attitude, Maggie. I so enjoy the articles you write about the creative ways you and your husband live, and the way you find peace and joy! I hope you have applied for, and receive, the Guaranteed Income Supplement you are eligible for as senior Canadians. Best wishes.

      • Your suggestion about GIS is very much appreciated!!! We do receive it, and it makes a very big difference in our small world. I find your take on the world very refreshing, and your articles current, interesting, well researched, and well written.

  11. joared says:

    Well-informed article. I find it incredible the whole “entitlement” concept misrepresentation foisted by the U.S. Republican Party on the American people seems to be accepted by so many since they elect these people to Congress. The discrepancy between the 1% wealthy and the rest of the population in our nation might not be so great if employees benefited more from their contribution to business, especially with a retirement plan.

  12. maddy says:

    Am I alone in the view that no-one should have to pay a financial adviser to ensure a reasonable retirement income? If we do pay them, we have no recourse if their advice leaves us worse off. One adviser told me the market wouldn’t crash and guess what? A month later the market crashed. Good job I didn’t listen to him.

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