2006 State Report > Economics > Pensions and Savings
Economics: Pensions and Savings
Once considered a cornerstone of retirement, standard pension plans are now being offered by fewer companies. According to the U.S. Department of Labor, only 57 percent of employees in private establishments had access to retirement benefits in 2002. Only 12 percent of workers aged 55 and over in 2005 expected a workplace retirement plan to be their largest source of income in retirement. An additional 20 percent expected their largest source of income would be an employer-provided pension that pays a set amount each month for life in retirement.
Largest Expected Source of Income in Retirement: 2005
| Ages 45-54 | Ages 55+ | |
|---|---|---|
| Workplace retirement savings plan | 15% | 12% |
| Other personal savings or investments | 19% | 15% |
| Social Security | 22% | 33% |
| Employer-provided pension that pays a set amount each month for life in retirement | 18% | 20% |
| Employment | 10% | 5% |
| Sale or refinancing of home | 3% | 6% |
| An inheritance | 2% | 2% |
| A lump-sum distribution from an employer-provided cash balance or defined benefit plan | 2% | 2% |
| Support from children or other family members | 0% | 2% |
| Don't know/refused | 9% | 3% |
Source: Employee Benefit Research Institute and Matthew Greenwald & Associates, Inc. 2005 Retirement Confidence Survey.
Many companies are freezing or ending pension plans for their employees due to the increasing cost of pension plans and regulatory uncertainty. While this is to be expected in financially troubled industries such as airlines and steel, even financially strong companies such as Verizon Communications and Hewlett-Packard announced in 2005 that they would be ending guaranteed pensions. To offset the loss of pension benefits, many employers have begun increasing matching contributions to their 401(k) plans. Middle-aged workers who have worked for the same company for years are the hardest hit when a pension is frozen because they have fewer years of work left and higher 401(k) matches will not make up for the loss of pension benefits.
According to Watson Wyatt Worldwide, a human resources consulting firm, the number of Fortune 1,000 companies who terminated or froze their defined-benefit pension plans increased dramatically in 2004.
Frozen or Terminated Pensions: 2001-2004
| Year | Frozen or Terminated Plans | % of Sponsors with Frozen or Terminated Plan |
|---|---|---|
| 2001 | 34 | 5% |
| 2002 | 39 | 6% |
| 2003 | 45 | 7% |
| 2004 | 71 | 11% |
Source: Watson Wyatt Worldwide, survey of Fortune 1,000 firms.
Another threat to retirement income is the growing amount of debt among older Americans. Nationwide, the average self-reported credit card debt of seniors over 65 increased by 89 percent between 1992 and 2001, to $4,041. About one-fifth of senior-headed households with credit card debt and incomes under $50,000 were in a state of debt hardship in 2001. This means they spent more than 40 percent of their income on debt payments, including mortgage debt. The frequency of bankruptcy among seniors increased by 244 percent between 1991 and 2002. The reasons for this increase in debt among our older population include insufficient retirement funds, deregulation in the financial services industry, rising health care bills, and the necessity of major home repairs.