The Need for Robust and Competitive Retirement Programs in the Post-Pension World

By Dr. Gary L. Deel, Ph.D., J.D.

The state of retirement plan programs for workers in America has changed drastically over the past few decades. In the 1980s, roughly 80 percent of American workers had access through their jobs to a defined benefit plan — a retirement program which stipulates a guaranteed payment in retirement to each qualifying employee. The most common type of defined benefit plan was a pension program. These programs generally called for either lump sum or periodic payments to employees after retirement, and employee eligibility was contingent upon factors such as age at retirement and length of service with the employer.

But the landscape for retirement programs has shifted dramatically since then. And today, only 14 percent of American workers are still eligible for any kind of defined benefit plan in their employment packages. This is a really signficant change because it comes as Americans are living far longer than they used to. In 1980, the average American life expectancy was roughly 74 years. Today, that number is closer to 79 or 80 years — an increase of roughly seven to eight percent in just four decades’ time. So retirement programs are more important than ever.

What has taken the place of defined benefit plans in private sector employment today? Primarily, it’s defined contribution plans — which are programs through which employees contribute a defined percentage or amount from their paychecks to a dedicated retirement account such as an individual retirement account (IRA).

The most common among these are 401K plans and the like. The contributions that employees make to these plans are often tax-deferred, which means that no income tax is paid on the money at the time it is invested into the account. The money is then allowed to sit in the account and grow with interest over time. However, tax is owed on the entire balance — whatever that may be — when the employee eventually withdraws the money in retirement.

Alternatively, employees may also be able to make what are called Roth contributions to their plans. With these contributions, income tax is paid on the money at the time it is invested in the retirement account, but then the money and all the…