More and more baby boomers are retiring and some are dying now. They are leaving behind a huge pile of money that the media has called the “greatest transfer of wealth” in modern history: a collective net worth that currently stands at $ 35 trillion, much of it will be. passed on to their heirs. It’s so much money that, understandably, the Biden administration is looking at ways to tax it, charities and nonprofits are looking for their share, and estate lawyers are licking their chops at the prospect. to help plan how everything is distributed.
Yet reporting on this wealth transfer overlooks something fundamental: a simple explanation of how baby boomers have amassed this wealth in the midst of an alleged massive financial crisis brought on by alleged inadequacies in our retirement systems. private sector, which four decades ago began to move from defined benefit pension plans to individual savings accounts. Rather than leaving a generation private, as critics have predicted for years, this shift has helped place an unprecedented amount of money in the hands of baby boomers, while exposing the inadequacy of systems. defined benefit plans that persist today in some places, especially in the ill-advised public sector.
The seeds for change were planted in the 1960s, amid several well-publicized failures of private pension systems (including a plan covering some 10,500 workers and retirees from a failed Studebaker auto plant in Indiana. , leaving registrants with only a few cents on the dollar). Pushed by such disasters, Congress created legislation to govern plans and protect employees, including rules on how workers should be invested in those plans and what constituted minimum funding requirements for pensions. The new rules seemed logical until it became clear that they had sharply increased the cost of funding defined benefit plans, which guarantee workers a lifetime income based on a formula that takes into account years of service. and the final salary of a worker.
Unable to meet these affordable costs and wary of the risks now involved, companies quickly began to move towards defined contribution plans, in which employers set aside a specific amount for each worker in an individual account. – a type of plan formalized in a 1978 Amendment to the United States Pension Act. The share of workers receiving defined benefit plans only in the private sector has therefore fallen sharply, from around 25% in the 1970s to around 3% today, while the share of participants in pension plans company-owned defined contribution pension has grown from 8 percent in 1980 to 31 percent today. Around the same time, Congress passed laws to allow those who worked for companies that did not offer retirement plans to save on their own through individual retirement accounts.
Boosted by market returns, the assets of these contribution plans have skyrocketed. In the last 25 years alone, the combined assets of employer-sponsored defined contribution plans and individual retirement accounts (many of which are renewals of corporate defined contribution plans by workers who have changed jobs) were multiplied by eight, to reach 23 trillion dollars. far exceeding holdings in any other category of pension plan. These accounts now account for nearly two-thirds of all U.S. retirement assets, down from less than 25% in 1995. They are the main reason Americans cling to some $ 34 trillion in retirement savings, a surprising increase of about $ 13 trillion two and half a decade ago.
Over time, the rate at which Americans have saved for retirement has increased dramatically. A 2016 study of retirement savings earnings over a 27-year period by Andrew Biggs of the American Enterprise Institute found that retirement savings of those aged 55 to 69 increased 126% after inflation , to reach $ 448,292. Not all of the gains were concentrated among the rich either. As Biggs points out, even the retirement savings of middle-income Americans increased by 70% after inflation at that time. These gains are accompanied by a sharp drop in poverty among the elderly. When Social Security benefits are included in the mix, less than 10 percent of older people retire with less than half of the income they earned while working.
However, something very different has happened in the public sector. There, defined benefits survived, in large part because federal legislation setting standards for private plans did not apply. Local governments have promised workers attractive pensions using more flexible accounting principles, making these plans more affordable. As a result, 86 percent of state and local government employees still have access to defined benefit plans today, but at enormous public cost. States and communities have harmed these systems by an estimated $ 1.7 trillion, for which taxpayers are largely responsible as more public servants retire. Even in the midst of this financial disaster, public sector union leaders fought vigorously to preserve defined benefit plans, calling efforts to throw them away in favor of individual savings accounts as a disaster that would increase poverty among workers. older people and increase retirement insecurity.
The attractiveness of defined benefit plans is understandable. They offer predictability, which seems especially important amid all the media coverage of the pension crisis facing workers in the private sector. But they only pay off for workers who embark on a long public service career with a single employer and then live long enough to receive a substantial portion of their benefits. These pensions set very little aside for workers in the early years of their employment. A 2013 Manhattan Institute study of public school pension systems, for example, found that a New York teacher who started in schools at age 25 would, at age 50, accumulate the equivalent barely $ 100,000 in retirement savings through a benefit plan. But if that teacher stayed for another 15 years, those savings would reach the equivalent of $ 600,000. The problem is that less than 33 percent of those who start a teaching career still stay 20 years. The rich pensions are the prerogative of the few who hold on. And even after a long career, much of the benefit wears off when the worker dies, leaving little to pass on. While some defined benefit plans offer spousal benefits (typically around 50 percent of the initial pension), these are costly for the worker and, of course, leave nothing to pass on to children and grandchildren.
The government is nothing but greedy for the wealth created in the private sector. Now that the rhetoric is shifting from “these poor retired baby boomers” to “these rich retired baby boomers,” proposals have emerged to tax these economies in new ways. The Biden administration proposed a capital gains tax on retirement accounts upon transfer to heirs. Other proposals include capping the amount that can reside in tax-free retirement accounts and taxing the rest. For years, politicians from both parties have considered “saving” Social Security in part by reducing or eliminating the benefits earned by those who have racked up millions of dollars in retirement accounts – an idea that looks like punishing them. people who did the right thing in preparing for their retirement. golden years.
As the Baby Boomers prepare to step not quietly, but richly, into this good night, the struggle for what they will leave behind has only just begun.
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