What Happened to the US Pension System?

A pension is your savior when you have crossed the retirement mark. They provide you income to cover your expenses even when you are no longer able to earn on your own.

So, whether you are just a year away from reaching the age of retirement or you are a fresh graduate who has just landed his/her first job, planning for life after retirement is crucial.

But if you are a U.S citizen, then securing a pension might be easier said than done.

Business analysts, as well as renowned economists, have declared that America is an example of how not to do pensions.

The Pension Crisis

The pension crisis, also called the pension time bomb is when a country faces difficulty in paying retirement pensions to its employees. The US has, unfortunately, become the country where this crisis has prevailed.

According to Boston College’s estimate, the 1,400 multi-employer / corporate plans in the US are facing a deficit worth $553 billion. And as if that isn’t bad enough, what is more alarming is the fact that government’s own pension funds are lagging behind by approximately $7 trillion!

So, what exactly went wrong? How did the pension system face such a huge setback?

Here is a brief answer.

The Reasons behind the Pension Crisis

Change in the workforce

Economists have accused shifting demographics to be a leading cause for the collapse of the US pension system.

You will probably be familiar with the term Baby Boom. In the years following World War II, there was a rapid rise in the number of infants born per year. Over 78.3 million Americans were born during this period.

Now, as these Baby Boomers have reached or are nearing their retirement age, it means large sums of money are needed to fund their pensions.  Moreover, the retirees are living longer on average so an increased lifespan also means more pensions payments.

On the other hand, there was a decrease in the relative number of workers due to reduced birth rates after the post-WWII Baby Boom era.

A large number of retirees with comparatively fewer employees working currently means a lower ratio of workers per retiree. As a result, the amount of funds that can be raised to support the retirees is lower.

The role of private organizations

Just a few years ago the corporate pension system in the US had about $250 billion in excess. Now, not only have the excess funds been depleted, but the pensions system has become critically underfunded.

This largely happened because several private companies used their surplus pension funds to finance other business expenses such as corporate downsizings, employee health plans and so on.

Stock market losses, weak investment returns and a fall in interest rates were some other factors that diminished the private pension funds.

The 401k Plans

The introduction of 401k plans was perhaps the last nail in the coffin of the US pension system.

It is a qualified retirement program that allows certain employees to save and invest for their own retirement. It is usually considered more beneficial for the retiree as compared to an ordinary pension. But with more people opting for the plan instead of contributing to the pensions, the overall effect is significant on other workers who rely on the funds from the pension system.

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