By MARY WILLIAMS WALSH
By many measures, today's older workers appear better equipped for retirement than any previous generation. Their homes are worth more than their parents' homes were. Their bank accounts are fatter. And study after study suggests that typical late-middle-age employees have accumulated more wealth than their counterparts did a quarter-century ago.
But virtually all of these studies have a flaw, a crucial asset that is left out of the equation. Add it back in, and the rosy picture suddenly darkens.
That asset is the traditional pension, an employee benefit that was widely available until the early 1980's but has been vanishing from the American workplace ever since. More than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983. By 2001, fewer than half did. The demise of the old-fashioned pension has been much discussed, but the effect on family finances has not. That is because the impact has been hard to measure.
New evidence suggests, though, that the waning of the pension has, imperceptibly but surely, stripped older workers of an immense store of wealth - much more than they probably guessed, if they thought about it at all. Retirement benefits today, particularly the 401(k) account, simply are not worth as much as the older kind of benefits. Some studies suggest otherwise, but they tend to rely on average balances of retirement accounts, and the averages have been skewed upward by the extraordinary gains of a few wealthy households.
When the holdings of more typical households are tracked instead, today's near-retirees turn out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983. The sweeping change in employee compensation appears to be the reason, according to new research by Edward N. Wolff, an economist at New York University who analyzed 18 years of household financial data collected by the Federal Reserve.
Mr. Wolff found that the average net worth of an older household grew 44 percent, adjusted for inflation, from 1983 to 2001, to $673,000. But much of that growth was in the accounts of the richest households, which pushed the averages up. When Mr. Wolff looked at the net worth of the median older household - the one at the midpoint of the economic ladder, a better indicator of what is typical - the picture changed. That figure declined by 2.2 percent, or $4,000, during the period, to $199,900.
For a generation to emerge from two bullish decades with less wealth than its parents had "is remarkable," Mr. Wolff said. Based on economic growth and market returns over those 18 years, he said, their wealth "should be up around 30 or 40 percent."
The Fed's household-finance data also show that when pensions were more common, they served as a social leveler. Companies that offered them had to use the same pension formula, involving years of service and salary, for all workers in a plan; otherwise, the companies risked losing their tax break. The rich in those days bought big houses and invested in stocks and other assets that were out of reach for the middle class. But pensions would offset, to some degree, the difference between how these groups lived in old age. Traditional pension plans were part of a system that reduced the poverty rate among the elderly to just 1 in 10 in 2002, the lowest in half a century.
The advent of self-directed retirement plans, by contrast, is giving rise to an elite minority who are well prepared for retirement, and a majority who are falling behind, the numbers show.
"The people at the top did better than they ever would have under the old system," Mr. Wolff said. "Basically, they made out like bandits."...
As it dawns on workers that they don't have enough to live on, some are simply deciding to delay retirement. The Society of Actuaries recently reported that the number of people who say they will never retire, while small, doubled from 2001 to 2003, to 8 percent. ...
<http://www.nytimes.com/2004/06/13/business/yourmoney/13unequal.html>
Carl
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