The American dream once provided workers with the promise that if they labored diligently for twenty or thirty years, they would be rewarded with checks that lasted the length of their retirement.
But times have changed, and pension plans, sometimes called defined-benefit plans, are on the decline. This decline in pension plans poses serious challenges for workers in terms of retirement security, because social security payments alone are not enough to help retirees make it through retirement.
So, what is causing the decline of pension plans in today’s job market? There are several key factors contributing to this decline:
1. Increased Life Expectancy
One of the driving factors that has caused the financial strain of traditional pension plans, and thus contributed to their overall decline, is an ever-aging population. Today, the average American life expectancy is 79.11 years – four years longer than the average lifespan in the 1980s. Not surprisingly, the longer retirees live, the more resources are required to sustain their pensions.
2. Defined Contribution Plans
More and more companies are opting for contribution plans, such as 401(k)s, over defined benefit plans. Employers prefer these contribution plans because they place the responsibility of retirement savings and investment decisions on the employees rather than the employer.
3. Regulatory Changes
Changes in government regulations, accounting standards, and tax policies have significantly influenced how companies approach employee benefits. For example, the Employee Retirement Income Security Act sets minimum standards for pension plans in the private sector. And under the Pension Protection Act, there are stricter funding requirements for employers that offer defined benefit plans. Increased regulation requires more work from employers, which in turn discourages these employers from offering plans that cause them more work.
4. Employer Risk
Pension plans require employers to contribute enough money to the pension fund so that it can pay lifetime income to employees once they retire. But there is no guarantee the money contributed will be enough. If investments perform poorly or inflation rises, an employer will need to reach deeper into its pockets and contribute even more money to the plan to maintain the lifetime benefits. As financial markets become increasingly more volatile, fewer employers are willing to bear the corresponding increase in risk.
5. Job Hopping
There was a time when workers would spend nearly their entire career working for a single employer. These days, the average American worker will change his or her job every four years. This modern job mobility makes it less practical for employers to maintain traditional pension plans which are better suited for long-term employment relationships.
6. Maximizing Shareholder Value
Corporations today will do almost anything to maximize shareholder value. This has caused many of those organizations to prioritize short-term financial gains over long-term employee benefits. This line of thinking has contributed to the decline of traditional pension plans in today’s job market.
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