Retirement Savings Lose $2 Trillion in 15 Months
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Oct 8, 2008, 4:00:51 PM10/8/08
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Retirement Savings Lose $2 Trillion in 15 Months
By Nancy Trejos
Washington Post Staff Writer
Wednesday, October 8, 2008; A01
The stock market's prolonged tumble has wiped out about $2 trillion in
Americans' retirement savings in the past 15 months, a blow that could
force workers to stay on the job longer than planned, rein in spending
and possibly further stall an economy reliant on consumer dollars,
Congress's top budget analyst said yesterday.
For many Americans, pensions and 401(k) plans are their only form of
savings. The dwindling of these assets -- about a 20 percent decline
overall -- is another setback just as many people are grappling with
higher gas and food prices, more credit card debt, declining home
values and less access to loans.
"Unlike Wall Street executives, American families don't have a golden
parachute to fall back on," said Rep. George Miller (D-Calif.),
chairman of the House Committee on Education and Labor. "It's clear
that Americans' retirement security may be one of the greatest
casualties of this financial crisis."
Even traditional pension plans, which are formally known as defined-
benefit plans and are widely considered more stable, have been hit
hard by the stock market's volatility, losing 15 percent of their
assets over the past year, Peter R. Orszag, director of the
Congressional Budget Office, told the House panel.
Despite the losses, companies will still be obligated to pay out the
same pensions promised to employees but will have to recoup the extra
costs in other ways, Orszag said. "When pension assets decline in
401(k) plans, the burden is on the workers," he said. "When pension
plan assets decline in defined-benefit plans, the burden is on the
firm to make up the difference. The firm will have to pass those costs
on to their workers, to their shareholders or to consumers."
Defined-benefit plans are company-sponsored programs that provide
retirement payouts based on an employee's salary and tenure. The
company shoulders the bulk of the investment decisions and risk.
Defined-contribution plans, such as 401(k)s, turn those tasks over to
the worker and are subject to the whims of the stock market.
Increasingly, employers have switched workers into defined-
contribution plans. The federal government has also pushed 401(k)
plans heavily, approving a law late last year that makes it easier for
employers to automatically enroll their employees in them and other
similar retirement plans.
Defined-contribution plans tend to be more heavily weighted in stocks,
either through individual holdings or mutual funds. As a result, said
Orszag, "the value of assets in defined-contribution plans may have
declined by slightly more than that of assets in defined-benefit
plans."
Through September, the percentage loss for the year in average account
balances among 401(k) participants was between 7.2 and 11.2 percent,
according to the Employee Benefit Research Institute's analysis of
more than 2 million plans.
Employees between the ages of 56 and 65 who had the fewest years on
the job were the least affected, while those 36 to 45 years old with
the longest tenures suffered the steepest declines, said Jack L.
VanDerhei, research director for the D.C.-based institute. Younger
workers tend to have more stocks in their portfolios while older
employees move toward safer investments such as bonds, VanDerhei said.
The findings exacerbate a complaint among many workers and academics
about 401(k) and similar plans that are heavily tied to the stock
market. Are they really the best retirement vehicles for workers?
"The loss of retirement security is a reversal of fortune and the
result of very specific flawed governmental policies that have been
biased toward 401(k) plans, rather than the result of technological
change or the logical consequences of global economic trends," Teresa
Ghilarducci, a professor of Economic Policy Analysis at the New School
for Social Research, testified before the committee.
Other academics and analysts say 401(k) plans allow employees to take
control of their retirements.
Jerry Bramlett, president of consulting firm BenefitStreet, said
401(k) participants should resist the urge to pull money out of stocks
because that would lock in their losses.
"Markets do go up and down, and 401(k) participants must try to
remember to think long-term," he said.
Many investors have been buying low-yield Treasury bills in recent
months because they are considered less volatile. Bramlett cautioned
against that because it would leave them vulnerable to inflation.
That said, 401(k) participants should evaluate their portfolios to
make sure their money is spread among stock and fixed-income
investments. They should also make sure they do not have too much of
their own company's stock.
Public pensions also have suffered. The assets held by state and local
governments' pension plans declined by more than $300 billion between
the second quarter of 2007 and the second quarter of 2008, according
to the Federal Reserve. About 60 percent of public pension funds are
invested in stocks, 30 percent in domestic fixed-income securities, 5
percent in real estate, and the remaining 5 percent in other products.
Miller called the findings "very cataclysmic for middle-class
families."
Several analysts who testified at the hearing said the most vulnerable
workers are those nearing retirement, who have large balances in their
retirement plans that are now shrinking. Tighter household budgets are
also crimping workers' retirement savings. According to a survey
released yesterday by AARP, 20 percent of baby boomers stopped
contributing to their retirement plans in the past year because they
have had trouble making ends meet.
Already, more and more workers are delaying retirement, a trend that
analysts and economists expect to accelerate because of the distressed
economy. The people age 55 and older who work full time grew from
about 22 percent in 1990 to nearly 30 percent in 2007, according to
the Bureau of Labor Statistics.
By 2016, the bureau predicts, the number of workers age 65 and over
will soar by more than 80 percent, and they will make up 6.1 percent
of the labor force. In 2006, they accounted for 3.6 percent of active
workers.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/07/AR2008100703358_pf.html
By Nancy Trejos
Washington Post Staff Writer
Wednesday, October 8, 2008; A01
The stock market's prolonged tumble has wiped out about $2 trillion in
Americans' retirement savings in the past 15 months, a blow that could
force workers to stay on the job longer than planned, rein in spending
and possibly further stall an economy reliant on consumer dollars,
Congress's top budget analyst said yesterday.
For many Americans, pensions and 401(k) plans are their only form of
savings. The dwindling of these assets -- about a 20 percent decline
overall -- is another setback just as many people are grappling with
higher gas and food prices, more credit card debt, declining home
values and less access to loans.
"Unlike Wall Street executives, American families don't have a golden
parachute to fall back on," said Rep. George Miller (D-Calif.),
chairman of the House Committee on Education and Labor. "It's clear
that Americans' retirement security may be one of the greatest
casualties of this financial crisis."
Even traditional pension plans, which are formally known as defined-
benefit plans and are widely considered more stable, have been hit
hard by the stock market's volatility, losing 15 percent of their
assets over the past year, Peter R. Orszag, director of the
Congressional Budget Office, told the House panel.
Despite the losses, companies will still be obligated to pay out the
same pensions promised to employees but will have to recoup the extra
costs in other ways, Orszag said. "When pension assets decline in
401(k) plans, the burden is on the workers," he said. "When pension
plan assets decline in defined-benefit plans, the burden is on the
firm to make up the difference. The firm will have to pass those costs
on to their workers, to their shareholders or to consumers."
Defined-benefit plans are company-sponsored programs that provide
retirement payouts based on an employee's salary and tenure. The
company shoulders the bulk of the investment decisions and risk.
Defined-contribution plans, such as 401(k)s, turn those tasks over to
the worker and are subject to the whims of the stock market.
Increasingly, employers have switched workers into defined-
contribution plans. The federal government has also pushed 401(k)
plans heavily, approving a law late last year that makes it easier for
employers to automatically enroll their employees in them and other
similar retirement plans.
Defined-contribution plans tend to be more heavily weighted in stocks,
either through individual holdings or mutual funds. As a result, said
Orszag, "the value of assets in defined-contribution plans may have
declined by slightly more than that of assets in defined-benefit
plans."
Through September, the percentage loss for the year in average account
balances among 401(k) participants was between 7.2 and 11.2 percent,
according to the Employee Benefit Research Institute's analysis of
more than 2 million plans.
Employees between the ages of 56 and 65 who had the fewest years on
the job were the least affected, while those 36 to 45 years old with
the longest tenures suffered the steepest declines, said Jack L.
VanDerhei, research director for the D.C.-based institute. Younger
workers tend to have more stocks in their portfolios while older
employees move toward safer investments such as bonds, VanDerhei said.
The findings exacerbate a complaint among many workers and academics
about 401(k) and similar plans that are heavily tied to the stock
market. Are they really the best retirement vehicles for workers?
"The loss of retirement security is a reversal of fortune and the
result of very specific flawed governmental policies that have been
biased toward 401(k) plans, rather than the result of technological
change or the logical consequences of global economic trends," Teresa
Ghilarducci, a professor of Economic Policy Analysis at the New School
for Social Research, testified before the committee.
Other academics and analysts say 401(k) plans allow employees to take
control of their retirements.
Jerry Bramlett, president of consulting firm BenefitStreet, said
401(k) participants should resist the urge to pull money out of stocks
because that would lock in their losses.
"Markets do go up and down, and 401(k) participants must try to
remember to think long-term," he said.
Many investors have been buying low-yield Treasury bills in recent
months because they are considered less volatile. Bramlett cautioned
against that because it would leave them vulnerable to inflation.
That said, 401(k) participants should evaluate their portfolios to
make sure their money is spread among stock and fixed-income
investments. They should also make sure they do not have too much of
their own company's stock.
Public pensions also have suffered. The assets held by state and local
governments' pension plans declined by more than $300 billion between
the second quarter of 2007 and the second quarter of 2008, according
to the Federal Reserve. About 60 percent of public pension funds are
invested in stocks, 30 percent in domestic fixed-income securities, 5
percent in real estate, and the remaining 5 percent in other products.
Miller called the findings "very cataclysmic for middle-class
families."
Several analysts who testified at the hearing said the most vulnerable
workers are those nearing retirement, who have large balances in their
retirement plans that are now shrinking. Tighter household budgets are
also crimping workers' retirement savings. According to a survey
released yesterday by AARP, 20 percent of baby boomers stopped
contributing to their retirement plans in the past year because they
have had trouble making ends meet.
Already, more and more workers are delaying retirement, a trend that
analysts and economists expect to accelerate because of the distressed
economy. The people age 55 and older who work full time grew from
about 22 percent in 1990 to nearly 30 percent in 2007, according to
the Bureau of Labor Statistics.
By 2016, the bureau predicts, the number of workers age 65 and over
will soar by more than 80 percent, and they will make up 6.1 percent
of the labor force. In 2006, they accounted for 3.6 percent of active
workers.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/07/AR2008100703358_pf.html
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