Redefining Retirement in the 21st Century for the Small Employer and America.

• Author: Reiss, Jerry

People are living much longer, which demands greater retirement savings. But the recent trend has been toward saving less. Greater longevity increases the chance that people will require long-term or assisted-living care, and without the funds to pay for such care, Medicaid will be stressed. Greater longevity provides added challenges to our social safety net programs. This article discusses how longevity affects our social programs and what changes can be made to adapt to the effects. Permanent alimony is under attack and has been questioned. In response, our statutes recently changed limiting eligibility. But even this public policy program requires a revisit to deal with the effects of greater longevity. Otherwise, it too becomes a thing of the past and everybody is left to fend for themselves as once happened before the 20th century.

The 20th century began with few worker rights. (1) Employees worked until they died or could no longer perform any services, and retirement frequently meant their children provided them with housing and basic care. (2) This changed after the Great Depression with the New Deal, by providing a social safety net and collective bargaining rights. (3) When wages were frozen in 1943, (4) unions used collective bargaining sessions to negotiate for health and retirement benefits. (5) These altered the landscape of retirement planning. When these new benefits were combined with the social security benefits, the two provided seniors with independence and dignity in their retirement and twilight years.

Wages, employee benefits, and workers' rights saw improvements throughout the 1950s, 1960s, and 1970s, but ended beginning with the 1980s as studies have shown. (6) The 1980s began with a period of runaway inflation. (7) High inflation was attended by very high rates of return on money market funds, CDs, bond yields, and stocks. (8) But the high rate of inflation ate into the security of pension payments made to the retirees of the period, which was first met with private pension plans adding cost-of-living adjustments (COLA) for pension plan benefits. That, however, was very expensive to fund and was met with IRS resistance when it published its final I.R.C. [section]415 regulations defining the upper dollar limit based upon a life annuity that employers could provide and deduct as a necessary business expense under I.R.C. [section]404. This upper limit was defined as the lesser of 100% of average compensation, or a dollar amount that would be adjusted for inflation as the cost of living required. This changed the way COLA benefits were funded, necessitating they be added on an ad hoc basis for qualified plans and adopted after the dollar limit was raised by inflation. To overcome inflationary concerns of the period, and the inability to fund those increased benefits, the 1980s saw the explosion of the 401(k) plan. (9) It was designed to supplement traditional pension plans during a period of high inflation, by providing an extra plan that was intended to be inflation proof, because runaway inflation brought with it high rates of return. (10)

The birth of the 401(k) retirement plan occurred ostensibly during the same time that the individual tax rate was lowered. (11) The lower tax rate paved the way for huge corporate bonuses that beforehand were pointless because so little reached the corporate CEO or CFO after taxes were paid. (12) The lower tax rate altered the direction of corporate growth from solely long-term growth, where employees were the most important asset driving long-term growth, shifting the focus to short-term corporate gain, where employees flipped from the most important corporate asset to a liability that interfered with corporate profit. (13) The reverse role employees played afterward slowed wage and benefit growth, allowing runaway bonuses for the corporate top. Such a change caused the corporate focus to shift to controlling employee cost, so that more and more bonuses could be paid.

The middle and late 1980s saw many corporate mergers and acquisitions that allowed jobs to be streamlined and eliminated. The acquisitions were partly underwritten with pension-rich funding by the purchasing company terminating the acquired company's pension plan trust and recapturing its pre-funded assets. The problem was so widespread it caused Congress to address and stop it by adding a 50% excise on recaptured assets to the corporate tax that would typically attach to earnings. (14) Eventually, when there was no more room to create more corporate profit through efficiency measures, mergers/acquisitions, or other means, as in recapturing prefunded pension plan reserves, corporations began migrating jobs to Asia, where employee wages are a fraction of what American workers are paid. (15) Job migration weakened the employee's bargaining position for improved wages and perks, and employee benefits began to decline and even disappear, as did the growth of worker's wages. (16)

Improved life expectancy, which otherwise exacerbated a dismal trend of wage and benefit growth, together with the unprecedented growth of 401(k) plans, eventually led to the decline and near extinction of pension benefits because actuarially forecasted costs were understated, allowing the 401(k) plan to be the primary retirement plan. Future old-age Social Security benefits came under attack because people were living so much longer, (17) and that was first dealt with during the Reagan administration by changing the retirement age from 65 to 67, which was delayed for 11 years and...