Happy first day of spring! We missed our regularly scheduled issue last week due to technical issues. Our apologies — let's get caught up.
In the previous issue of Retire with Money, we explored the growing wealth gap affecting Americans’ retirement outcomes. While the average 401(k) saver saw major gains last year, almost half of the country is still facing financial insecurity in retirement.
A closer look at recent research suggests that the shift away from pensions in the private sector is a major driver of wealth inequality among older Americans. The National Institute on Retirement Security, or NIRS, found that among retirees with pension income, 91% lived above 200% of the federal poverty level. (That’s currently $23,120 for single retirees and $32,180 for couples.)
By comparison, only 60% of retirees without pension income lived above that threshold. What’s more, another analysis by the Congressional Budget Office found that the shift away from pensions may be responsible for roughly one-fifth of the increase in the nation's wealth inequality from 1989 to 2019.
The obvious solution, then, is to restore pension plans for workers, right? IBM, one of the largest companies in the U.S., did just that. It ended its 401(k)-matching program and reopened its old defined benefit program in the fall, leading many to wonder whether other companies will follow suit.
It’s not so simple, says Dan Doonan, executive director of NIRS. While IBM is considered a trendsetter when it comes to human resources policy, its “Retirement Benefit Account,” which the company says is part of its personal pension plan, isn’t exactly like a traditional pension.
Doonan explains that the move by IBM was largely situational. The tech company had a surplus of $3.5 billion in its old defined benefit plan, which it closed nearly 20 years ago. IBM can now use that surplus to pay for employees’ retirement benefits instead of company cash.
One recent study determined that only a handful of other large companies with a large surplus left in closed pension plans could potentially follow IBM’s lead.
There are plenty of reasons why private companies are unlikely to create or reinstate defined benefit plans. You can read my story to find out why — and if you’d like to share your own retirement story or savings experience, drop me a line at mcags@money.com.
— Mary Ellen Cagnassola, Money reporter
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