The Three R's Revisited: Retirement, Rithmetic, Rectify

Abstract

For 30 years following the end of World War ll, a defined benefit (“DB”) pension plan was the centerpiece of the retirement income strategy adopted by both private and public sector employers. However, with the passage of the Employee Retirement Income Security Act (“ERISA”) in 1974, followed four years later when paragraph “k” was added to 401 of the Internal Revenue Code, the past 40 years have seen a strategic transformation. That is, defined contribution (“DC”) plans, especially the 401k, have rapidly increased to become the dominate employer retirement income strategy, especially in the private sector.Today various factors combine to make prudent reexamination of public sector DB retirement plans both timely and vital. These factors include (in no order) the Great Recession, recurring (and perplexing) economic bubbles, stubborn wage stagnation (exacerbating income and political disparity), a steep decline in union membership and collective bargaining, apparent rips in the fabric of our social contract, et cetera. Investigating this quintette is beyond the scope of this Paper, the main objective of which is to encourage a positive public dialogue regarding whether the cost/benefit ratio of public DB retirement plans is both equitable and sustainable. And in that light, there is growing concern that 19% of taxpayers approaching retirement in the 55 to 64 age bracket (and 31% overall) report no retirement savings or pension at all. So, will shrinking middle class taxpayers, financially weakened because their wages have been stagnant for decades, and with a too small, if indeed any retirement income nest-egg at all, continue to make near-millionaires out of public servants who retire at age 55? Really? And also continue to turn a blind eye toward a shameful truth; i.e., that 40% of the city’s children are trapped in abject poverty, with their American Dream turning into a nightmare?