Coming Boomer pension cuts: what impact on economy?
Biggs, at American Enterprise, said he had previously done his analyses for the Social Security Administration, whose techniques he described as the gold standard of mathematical modeling.
Undoubtedly, he’d seen “The Disappearing Defined Benefit Pension” report?
“Umm,” Biggs said. “Can I get back to you on that?”
After looking the study over, he volunteered that he did not consider the findings significant. “Are people being made worse off by this shift? It’s not clear that they are,” he said.
To illustrate his point, Biggs calculated the percentage decline in income when the elimination of defined benefit pensions was spread out over the entire cohort of the youngest Boomers — including the majority who were never in line to receive such pensions to begin with. By that calculation, he said, the annual loss of income amounted to only 1.6 percent, or $700 per household — a sum, Biggs said, that could be made up by postponing retirement by just a few months.
“I’m having a hard time seeing how any of this makes a difference,” Biggs said.
But asked about the impact among those workers who would actually be affected by the proposed changes — crucial, one would think, for weighing whether policy makers should continue to eliminate defined benefit pensions, help them survive or even reverse course to restore them — he acknowledged that the report did show “more losers than winners” when defined benefits were cut. “It’s clearly a more significant impact on the people who are impacted,” he said. “Relative to everybody, it’s not a huge impact.”
“The question is, ‘How much more would we have to subsidize defined benefit pensions to keep them around, and what are you willing to pay?’” he added. “The answer is, ‘Not much.’”
At any rate, Biggs said, he did not consider the consequences for consumer spending important in assessing pension policies. “I don’t want to focus too much on consumer spending because I think it’s a bad measure,” Biggs said. “It’s entirely overrated.” Consumer spending is only important to the economy in the short-term, he added. “Over a longer period of time, you’d prefer higher saving to higher spending.”
Biggs’ view was surprising in view of the fact that, in other spheres, economists at American Enterprise describe increases in consumer spending as key to reviving a stagnant economy.
And, if higher savings are more important in the long term than higher spending, it is not clear how Boomers having lower retirement incomes would facilitate their saving more. Indeed, Biggs did not propose that constricting defined benefit plans would somehow nudge Boomers to towards additional savings. Rather, he predicted, Boomers would work longer to make up for the lost income.
But that is not a solution for everybody, said Keith Brainard, research director at the National Association of State Retirement Administrators. Brainard attributes a nationwide “crisis in retirement” largely to the shift from defined benefit pensions to 401(k) plans, that is stripping away the spending power of Boomers entering retirement. “WalMart can only hire so many greeters,” Brainard said.
Do Boomers save for their retirement?
Utah State Senator Liljenquist was operating under the assumption that, other than public employees. “Everyone else saves for their retirement.”
In fact, according to a 2004 book, Coming Up Short: The Challenge of 401(k) Plans, by Alicia Munnell, director of the Center for Retirement Research at Boston College, 26 percent of people who are eligible to contribute to a 401(k) plan at work do not. And more than half of the people contributing to 401(k)s and other voluntary retirement accounts typically cash out when they leave a job, hatching their nest egg before its time.
Boomers appear to be particularly unprepared for retirement. A third of all boomers have $1,000 or less put aside for retirement, said Matt Thornhill, author of “Boomer Consumer: Ten New Rules for Marketing to America’s Largest, Wealthiest and Most Influential Group.” Some 25 million Boomers have not saved anything at all toward retirement, he added.