Rethinking the RETIREMENT SYSTEM – population changes affect social security – Statistical Data Included

Rethinking the RETIREMENT SYSTEM – population changes affect social security – Statistical Data Included – Panel Discussion

J.P. Donlon

About 76 million Americans will be retiring over the next 10 years. Some are your employees. Are you ready for the upheaval that may follow?

THERE’S NO GETTING AWAY from it. Population changes throughout the developed and developing world are already influencing politics and society–and the impact will only intensify in the years to come. Only in the U.S. and parts of the English speaking world does the birthrate barely maintain population levels. Were it not for immigration, U.S. population growth would be flat. “In the rest of the developed world, there are no young people,” writes Peter Drucker, who has observed these trends for close to a quarter century. “In Italy, the birthrate’s down to about one-third of the reproduction rate; in Japan, it’s half the reproduction rate. And in all countries except the U.S., Canada, Great Britain, and Australia, the number of people under 15 is past its peak. That’s unprecedented. Nobody has any experience with it; we don’t know what it means.”

One thing it does mean is that the old retirement system of defined benefits and Social Security won’t hack it. Social Security may have made sense during the Great Depression, but with the population living longer it’s only a matter of time–2015 in fact–until the balloon bursts. The number of workers relative to retirees continues to decline, from 16-to-1 in 1950 to 3.4-to-1 today. As a result, the average worker born before 1960 can only expect a 1.8 percent rate of return from taxes paid to Social Security, a small fraction of the return he or she would garner from other investment alternatives, such as the stock market.

“I firmly believe that no one under 40 should plan on Social Security as part of their retirement,” says Tim Ballard, president of Carl A. Nelson & Co. “The success of our 401(k) over the last 13 years has led me to believe that we should gravitate towards the private sector to manage our retirement funds.”

In the following roundtable, partnered with Persumma Financial, a Newton, MA, Web-based provider of 401(k) plans to businesses and member of the MassMutual Financial Group, business leaders grapple with the challenge of meeting wide ranging employee expectations regarding retirement. CEOs participating in the discussion acknowledged that people’s expectations today differ greatly from those a generation ago, prompting some to ask, “What is retirement today?” A few points clearly emerge: employees want portability and flexibility in their benefit plans.

Ultimately Congress will need to raise ceilings on amounts invested as well as permit “look-back” provisions that allow wage earners to fund previous years’ plans. But thinking about reform is one thing; changing the metric is another. Currently, 80 percent of all U.S. workers pay more in Social Security taxes than they pay in Federal income taxes. Yet, at the end of the day, government will not be able to provide anything but a poorly constructed safety net. (CE’s April 2001 roundtable will focus on the issue of Social Security reform.)

At the same time, many low wage earners can’t find the disposable income to participate in 401(k) programs. What’s more, educating the nation’s workforce about the necessity and benefits of wealth creation will be an enormous undertaking.

Rethinking retirement in both the public and private spheres is a necessity–and not just because of an aging population. Young people want a better deal. And, as the labor force continues to constrict, providing one may be intricately tied to attracting and retaining personnel.

J.P. Donlon

Financing the Golden Years

Spencer Williams (Persumma): Retirement no longer means what it used to mean to many of us. A system that started with social security and with defined benefit plans, the sort of guaranteed retirement that has existed for a number of years, has evolved.

Business events that took place all through the ’70s, such things as double digit inflation and rapidly changing businesses and markets, made corporate America unable to guarantee a worker a steady retirement. These factors led to the birth of what we call “defined contribution,” a concept that evolved gradually and continues to evolve.

Clearly there are segments of our workforce today where defined benefit or guaranteed pensions not only don’t apply, they’re not of interest anymore. What we’re looking at is a growing part of the population that is ‘self-starter, do-it-yourself’ oriented.

The defined contribution instrument called 401(k) is actually an accident of the tax code. I won’t go into all the arcane details of how this accident came to be, but 20 years later we sit here with $2 trillion in the system. In one sense that’s a phenomenal success in privatizing savings. But if you take the lid off and look inside, we’ve got 40 million Americans who are counting on the 401(k) for their retirement. About 90 percent of these people don’t know where they stand. About 10 percent are doing very well.

Looking at the 90 percent, we think it’s time for another evolution, one that enables an individual to make choices based on responsible advice. More than 70 percent of people we surveyed said, “I don’t get enough advice or guidance in my retirement planning.” And we, as an industry, have been at fault for a while now in not stepping up and saying we’ll do that for you.

Clearly the demographics are significant. Seventy-six million Americans are going to retire in the next 10 years. Are they ready? What can we do to put them on a self-paced, self-learning track to retirement?

We have a lot of individual investors today who simply didn’t exist 20 years ago. Fifty-one percent of American households now own some form of security. This was simply not true when the 401(k) was founded. The Internet has made it possible to look at individuals in a company and respond to their individual needs. We can consider the personal aspects of your life, your family situation, and changes that are occurring and address them. It’s time to put this new capability to work.

People think of retirement in incredibly diverse ways: What can I do that I really wanted to do my whole life? Is there something I can give back to society? Will my lifestyle change? How do I stay active? Those questions scream out for a different set of definitions about how we as institutions help people find their answers. I think we have that responsibility, which is intimately tied to attracting and retaining personnel.

There are many different workforces within most companies today. Within a large print company in Chicago that generates more than 70 percent of its revenues from printing presses and printing materials, for example, there is now a group of employees whose needs are entirely different than the majority of the workforce.

We need to recognize those differences and use technology and flexible products to respond to different groups within such companies. This is true in every company in America today, particularly at the large end of the market where companies really are not homogenous anymore. So, we should be looking at individual situations that require different answers than the traditional one.

There also are social and government aspects to think about. Consider our 401(k) system, the primary retirement vehicle today for most Americans, and do some simple math. Starting at age 20, you can contribute $10,000 a year and you’re still going to have a gap between what you can save, inside a qualified tax system, and what you’ll need for an extended life span. Some $250,000 at retirement may sound like a lot of money, but if you’re retiring at 65 and your life expectancy is 82, it’s not much at all. We badly need changes in policy that will allow us to expand our savings within the 401(k) system.

Arnold Pollard (CE): What percentage of employees put a retirement plan toward the head of their list in what they care about when selecting or deselecting an employer?

Williams: Our research showed that 73 percent of respondents said that the retirement package was an important consideration. So it’s a huge weapon in your arsenal to attract and retain folks.

Ilene S. Gordon (Pechiney Plastic Packaging): To encourage our French employees, I raised the match to 75 cents on the dollar and the number of people participating increased from about 40 percent to about 65 percent within 60 days. I think companies need to encourage more people to contribute by doing the match.

Michael Tanner (CATO Institute): There are limits to the participation you can expect. The academic literature suggests participation is more a function of income than of incentive, even with very high matches. The lowest wage workers have minimal participation. If you look at workers under $15,000 a year, their participation rates in 401(k) plans are under 30 percent. Those people lack discretionary income, which has serious long-term consequences for the U.S., where we removing to a society of investors who are getting wealthier and non-investors who are falling behind.

Williams: People are lethargic about their retirement. It’s always multiple years away. It’s not like healthcare. Healthcare is an everyday issue for us. Retirement always seems to be tomorrow. But we know from survey results that if you get people into the system, after that first $5,000 of savings it becomes a habit. It becomes something that they actually enjoy and pursue and realize has a long term benefit.

Michael F. Magsig (Heidrick & Struggles): There are two other forces we need to consider. One is the whole concept of healthy aging, people are living longer and living more healthy lives. Two, the whole concept of personal independence. Those two forces create a dynamic. People have traditionally lived their lives in phases and now adults are living more in cycles. With respect to education, work, and retirement, there’s a greater desire for easier entry into and exit from each of those cyclical experiences.

Chris Richardson (Schneider Electric): It seems to me that if you remember the Depression, you want to know what’s going to come out the other end. The next generation doesn’t have that association. My kids don’t have a clue what a depression is. Therefore, what they feel about retirement and how they’ll get there is really different.

Larraine Segil (The Lared Group): A variable that’s making this much more complicated is that longevity of employment is no longer the value that it used to be. So how do you manage these issues when you have a career that may span five or six employers and various human capabilities?

Williams: Defined benefit doesn’t really work for them. We found that fully 53 percent of our survey population had more than one 401(k). Defined contribution is significantly more portable than defined benefit. But real portability will only happen with a legislative change.

We can achieve near portability by giving someone a continuous experience. I can retain the profile that I created with my prior employer when I go to the next place. The Internet is a tool that allows us to individually centralize our financial assets and financial planning. We allow you to aggregate multiple 401(k)s, plus an IRA or two plus your spouse’s 401(k). You can look at your retirement holistically, as opposed to in bits and pieces.

J.P. Donlon (CE): But it’s still kind of patched together.

Williams: That’s true.

Robert W. Hawkey (Leach Holding): The defined benefit plan is no longer meaningful to young workers; they’re looking for the defined contribution. The practical problem presented to us as employers is how we will fund an attractive defined contribution plan without giving up on those people who are mid-career and have a vested stake in the defined benefit plan.

Robert R. Gaudreau (Regus Business Centres): I don’t think the retirement that people are planning for will happen. Right now the average age at death is 82, and it’s estimated that only one person in 10 is financially prepared for a 17-year retirement. Advances in biotechnology are such that 50 percent of the human body may be replaceable in 20 years. People will live even longer. So if nine out of 10 aren’t ready today, what’s it going to be like tomorrow?

Also, the generation behind the workers retiring in 10 years is not large enough to replace them. There’s about a 10 percent deficit. Forty-four percent of people in retirement would like to work, according to certain statistics. So I think they will keep working. They will work healthy and happy, and we will need them. So, why don’t we talk about keeping them working and happy and use the 401(k) as a benefit our companies can use to recruit and retain?

Tanner: The chances of keeping people in the work force in this country beyond retirement age are slim. Politically, raising the retirement age is the least popular of all proposals for Social Security reform. In fact, people want to retire earlier rather than later. And there are significant issues when you get into retention, such as the type of work and life expectancies. If I’m a longshoreman or a coal miner, getting me to work an extra few years is a lot tougher than if I’m shuffling papers in Washington.

While GDP is fairly high right now, it will shrink because there’ll be fewer workers. In fact, if it weren’t for immigration, we actually would have a shrinking work force today. And within about 10 years, immigration will no longer be enough, and the work force will decline. We’ve already got women in the work force about as fully utilized as is likely to occur. Immigration is flat, and birth rates are such that we will have a declining work force.

G. Bennett Stewart III (Stern Stewart): When workers participate differently in a 401(k) plan it creates an unfairness in their treatment. It only exacerbates the have and have-not problem. I’m wondering if there’s a mechanism that a company can use that essentially forces people to participate in these plans. Is there some sense in moving from a defined contribution to maybe an undefined contribution, or what we might call “earned contribution plans,” where there’s an incentive to the whole workforce based on sharing the economic value they create–essentially, a compulsory defined, earned contribution plan. In other words, where the contribution is geared to a share of the profit but it is pervasive, it’s communal. Also, mobility and retention are in conflict. I don’t know what the answer is, but there’s always a trade-off on these design issues, and the flip side of mobility is retention.

Tanner: That’s the way much of the world is moving. That’s the movement in public sector pensions and Social Security systems around the world, a mandatory defined contribution system added to the current system. It would have a significant impact, especially on low- and middle-wage workers. The Social Security already takes 12.5 percent of your income; it’s the largest single tax that most Americans face. To re quire an additional payroll tax on top of that would be extremely difficult.

Stewart: The additional contribution would come out of the increase in the economic profit generated by that plant and that business. It would be based on engaging the work force in accomplishing real productivity gains. It’s an economic profit-sharing plan.

Kenneth J. Bauer (Long Island Railroad): Getting back to some earlier comments, not only won’t they retire, some people won’t be able to afford to stop working. Shifting from defined benefit to defined contribution requires an educational process that hasn’t really followed for the masses. A small percentage of people are going to do very well with these defined contribution programs, but most will not. First, you can get your hands on that money too easily and, second, people are making bad investment decisions.

When we run a defined benefit program, the company sets the asset allocation, hires a professional investment manager, and retains a professional financial consultant to review the manager’s performance. A lot of companies that go the defined contribution route bring in a provider who gives you seven selections and you’re on your own, virtually. Once a quarter you get a little seminar on what you should be thinking about. But how well does that really serve people?

Magsig: We’ve got to take the arbitrariness out of the system, whether it’s an arbitrary retirement age or an arbitrary form of pension coverage. We’ve got to look at the fact that we live in a very independent, mobile society. These forces work very much against us in addressing the point raised earlier about an employee shortage. We can’t manufacture in the next 10 years several million 20-year veteran employees to fill slots that will be there.

It would be a sad commentary on this country to find its GDP declining because we have an insufficient work force. We’re more creative than that. There are people in parts of the world who are going to be in need of reasonable employment. We’ve got people who will be put into retirement because they reach a certain age, people who would look for an opportunity to reinvent themselves. And what kinds of incentives are they being given to do that? They’re being “disincentived” today. I’ve worked with actuaries all my life. They’re talented people. But I think we’ve got to look at this science and say, are there ways that we can afford more flexibility in society to address these problems?

Gaudreau: It’s happening already. When they can’t hire people here, companies like Microsoft are writing code in India because you can’t get the people here through immigration, so you take the work there. And Western economies have watched manufacturing shift to Third World countries.

Knowledge work is starting to shift overseas for the first time so that the most valuable, highest paid jobs are going abroad. These are the kinds of jobs that seniors can and should be doing because they are a valuable part of the whole workforce ecosystem that’s being ignored. So, when I see large amounts of knowledge work shifting to India, to Pakistan, to Ireland, I just think we have to look outside the box.

William C. Byham (Development Dimensions): People are already going into second jobs after they retire. That’s because they don’t like the job they had before; they got tired of it or burned out. That means the company trained this person, got him knowledgeable about the firm, the products, and the customers, and then he’s going someplace else and wasting that knowledge.

It doesn’t have to be. How do you help people retire gradually? There’s been some talk about multi-jobbing so that at a certain point you can work half for your old company and half to become a minister, a teacher, or something. Creative things like that will require fixing the retirement system. In some fixed benefit systems, you get paid on the last five years of earnings. So, if you want to work four days a week, you’re cutting into your retirement. People are smart enough to say, “I’m going to get out but at my peak.” So you force good people out the door.

Rick Shoff (Persumma Financial): The lack of flexibility is troublesome. We all struggle to have a certain strategy put in place, and then somebody says there’s a restriction against that.

Segil: Two comments. First, Singapore’s government is highly supportive of business in general. One thing they did was release immigration restrictions for workers who are knowledge workers and could be helpful to Singapore industry. So, CEOs there are doing job searches worldwide. That’s an emancipated perspective that perhaps we should consider here.

Second, should there be an entitlement that enables people at a certain age to get a certain something? Is there a governmental responsibility that has to be supported by private industry that says we’ll take care of you later in life?

Ron E. Doggett (Goodmark Foods): Regardless of how much I talk to workers about their benefits, these people want it now. They want the opportunity to manage their incomes and manage their way toward retirement.

So I set about a plan to cut our drop out rate of senior executives, the top 20 percent of our people. It was built around a system of goals that enabled them to see what they were accumulating for their retirements. In addition to that they had a good defined benefit program. We had stock option programs, 401(k)s, long-term incentive plans, all goal driven. If they didn’t earn it, they didn’t get it. They understood that and to this day they talk about what they’re accumulated over time.

Leigh J. Abrams (Drew Industries): I’m optimistic. This country has always tended to adjust to the needs of its society, and I think that’ll happen again. I remember a speech by Jimmy Carter 20 years ago saying we would all be in the poorhouse today. The country wouldn’t grow any more. That didn’t happen.

Tanner: If you look to Europe as a comparison, the population in every European country except Ireland is declining. The worker to retiree ratio in Austria is already 1:1. It’ll be 1:1 in Germany within the next 10 to 15 years.

Peter Rust (Con Edison Communications): What’s happening to their productivity though? It’s going up. I think the GDPs are going to continue to increase. We just went through the greatest productivity increase over the last 10 years the country has ever seen.

Stewart: There’s a tremendous opportunity with the 50- to 55-year-olds retiring who have a huge knowledge base. With the advent of the Internet and distance learning programs, there’s a great opportunity to capture and leverage that knowledge.

Our recent effort to convert a lot of our knowledge capital to a CD-ROM based training program was found to be very effective in helping large numbers of employees to almost instantly grasp how to manage a business for real economic profit. I think every company should consider establishing a learning institute where employees in their 50s and 60s can have a period of time away from their day-to-day responsibilities to capture and leverage their knowledge.

Byham: Obviously GDP is important but it’s just an accumulation of how well a lot of companies do. And if you talk to CEOs, which I do a lot, they’re worried about having enough managers to expand. They’re worrying about the knowledge going out the door of how to run the company. You’ve got to grow that within and it takes time, so you’ve got to keep your knowledge workers, your good managers, five years longer on average, which would have tremendous impact on the profit of the firm.

Daniel L. McCaw (William M. Mercer): You’re right. The demographic die has been cast. But what happened to the retirement age in the last 20 years? It’s come down. Many companies have defined benefit plans out there that provide heavily subsidized early retirement. Why do that when we’re in a war for talent? Frankly, if we’re going to hold onto key executives, there’s going to be a price associated with it because this is becoming a simple supply and demand issue.

Gordon: I come from old-line America, and I worry about profitability. I’m in a competitive industry, and I’m not sure I can afford a lot of the programs that have been mentioned. We need products that pay for them-selves. I did hear some comments about contributions to 401(k)s that are based on success sharing. They fund themselves because the workers buy into the need for profitability. Otherwise, I’d go out of business if I spent money on training people without making more money at the same time.

Tanner: What to do with Social Security is an issue that was featured heavily in the presidential race. Fifty-seven percent of voters said they supported individual accounts. I’m predicting that under George W. Bush you will see a major move in 2001 to implement some form of Social Security privatization.

Pollard: There’s got to be a host of problems when you’re in a switching mode.

Tanner: There is no painless way to do this. And one of the unfortunate things in our election campaign was that neither candidate was particularly honest about this. The fact is that you’re going to have to find the revenue to continue to pay benefits to current beneficiaries.

McCaw: You might be interested in the Canadian experience. The two major differences are that the system’s been around for 35 years, not 65 years as in the States, and is more modest in terms of contributions and benefits. But, much like the States, the system started with contributions that were about 60 percent of what you really should contribute over your working lifetime to earn a benefit. These pay-as-you-go programs can work. Unfortunately, they demand that enough people come into the work force to support the people leaving the work force. That isn’t happening any more.

Fairly recently, the government started moving to increase the contribution rate to about 1.5 times the benefit you’ll actually get. And the projection suggests that this will stabilize the system. Also all new contributions to the program go into the private sector.

Tanner: There are a couple of issues that may come up with the Canadian system. They have potentially chosen the Clinton route of having the government do the investing, which does earn you returns from capital markets. But already we’re seeing political debates over how these investments should be made. A big question is whether they should invest in U.S. companies or in Canadian companies. Quebec immediately started arguing not enough was going to Quebec industries. Another issue is your rate of return for individuals. The rate of return for the system is going up, but you’ve already decreased your rate of return for individuals in a world where people know that you can earn 7.5 to 8 percent historically in private capital markets.

Gaudreau: To me it just screams that if you’re under 50, you’re in trouble. It requires wealth creation, employee stock option plans, and making your firm profitable so you can help employees achieve individual wealth creation.

Ed Shultz (Murray): One of the things we’ve been able to do is change some of the benefits. We traded some holidays for what would, in essence, be a forced contribution into a 401(k). We did this because they literally can’t afford, or at least they believe they can’t afford, to participate.

Gordon: With respect to wealth creation and retention, I’m in favor of programs that have some type of vesting. Not long term, but maybe four years so that employees find it attractive and can build up some wealth. I really want an employee to stay the three, four, or five years before walking out the door and taking that with him.

Richard E. Zuschlag (Acadian Ambulance Service): Speaking of success sharing, when you have an ESOP, the more profitable you are the greater value it will create for your shareholders. But with typical 33- to 35-year-old paramedics, it’s hard to educate them on economics. Recently our company invested $1 million in a start-up situation in Mississippi. A lot of the younger paramedics would have preferred a 6 or 7 percent increase in salary because they want the money now. The medics over 40 are beginning to realize the importance of retirement. They see that by making that investment and continuing our growth, we’ll create additional value for their ESOP later on. So education of the workforce is a very important part of success sharing.

Donlon: What can happen in our lifetime, to get the system changed in order to do all these things that we all seem to agree are necessary?

Williams: I believe regulation actually follows marketplace practice. When I visited the Department of Labor to talk about our business proposition they said, “Gee, we’ve always thought that ERISA, which is what governs all of this, is a very flexible vehicle, and we’re happy to see the marketplace taking action within the boundaries of this flexible law.”

The match correlated to performance–we heard that from several folks today–is a huge best practice, and there’s multiple ways to administer it. Another best practice is actually giving disproportionate profit sharing to lower paid employees where there are all types of benefits for senior executives. So, within the system there’s a fair amount of flexibility, all of which is part of attracting and retaining employees.

At the macro level, portability and raising the 401(k) limits are essential, even though only 2 percent of workers actually hit the limit today. It raises people’s awareness of the value of this benefit. And we all know you’ve got to get 6 to 10 percent of your salary from about age 24 in order to have a reasonable replacement ratio when you retire.

While helping people be portable doesn’t necessarily serve our interests as employers, we have to face reality. People will be portable, and there are other incentives in our companies to compensate for that. Multiple accounts over short periods of time are really disincentives to accumulating the amount of money people need.

Shoff: As decision makers we’ve been forced, particularly in the private pension sector, to settle for the least common denominator. Very rarely does this type of conversation take place at the HR level down where decisions get made. I think it’s extremely important that we start to push outside the box of what vendors and legislators tell us retirement should be. Redefining that is something that would definitely make a difference tomorrow and move some things forward.

Who’s WHO

* Leigh J. Abrams is president and chief executive of White Plains, NY-based Drew Industries, $330 million manufacturer of aluminum/vinyl windows and doors.

* Kenneth J. Bauer is acting president of NYC-based Long Island Railroad, the largest commuter railroad in the U.S. at $365 million.

* William C. Byham is chairman and chief executive of Bridgeville, PA-based Development Dimensions, a $104 million consulting services firm.

* Ron E. Doggett is chairman and chief executive of Raleigh, NC-based Goodmark Foods, a $200 million leading producer and marketer of meat snacks in the U.S.

* Robert R. Gaudreau is chief executive of Purchase, NY-based Regus Business Centres, a $400 million worldwide provider of business centers.

* Ilene S. Gordon is president of Chicago-based Pechiney Plastic Packaging, a $309 million packaging and shipping materials company.

* Gregory K. Guckes is COO of Aurora, CO-based American Medical Response, a $1.6 billion ambulance services company.

* Robert W. Hawkey is president and COO of Wesport, CT-based Leach Holding, an aerospace and bio medical company.

* Michael F. Magsig is partner of NYC-based Heidrick & Struggles, an executive search firm.

* Daniel L. McCaw is chief executive of NY-based William M. Mercer, a management consulting firm.

* Chris Richardson is president and chief executive of the North American division of Palatine, IL-based Schneider Electric, a $8.4 billion manufacturer of electrical and industrial products.

* Debra Richman is president and chief executive of, an internet portal for seniors based in New York, City.

* Peter Rust is president and chief executive of NYC-based Con Edison Communications, a subsidiary of billion utility supplier Con Edison.

* Larraine Segil is co-founder of Los Angeles-based The Lared Group, an international consulting firm.

* Rick Shoff is executive vice president of Persumma Financial, a full-service, online 401(k) provider.

* L.E. (Ed) Shultz is president and chief executive of Brentwood, TN-based Murray, a $450 million manufacturer of lawn and garden equipment.

* G. Bennett Stewart Ill is senior partner of NYC-based Stern Stewart, a consultancy firm.

* Michael Tanner is a senior fellow of Washington, D.C.-based CATO Institute, a nonpartisan public policy research foundation.

* Spencer Williams is chief executive of Persumma Financial, a full-service, online 401(k) provider.

* Richard E. Zuschlag is president of Lafayette, LA-based Acadian Ambulance Service, a private ambulance services company.

COPYRIGHT 2001 Chief Executive Publishing

COPYRIGHT 2001 Gale Group