Younger generation's retirement prospects are brighter than believed

STAYING AHEAD

September 26, 1994|By JANE BRYANT QUINN

NEW YORK -- There have been many stories in the press bemoaning the baby boomers' prospects for a comfortable retirement. The bottom line is always the same: Boomers' pensions are poor, they're saving too little, they'll wind up broke, their parents' generation had all the luck.

But it's far too early to make such sweeping statements, says the Employee Benefit Research Institute (EBRI) in Washington. There are legitimate reasons to worry. But in many ways, the boomer generation's retirement savings are looking unexpectedly strong.

To begin with, boomers have more access to pensions than their parents did.

Back in 1950, only 25 percent of the work force was covered by employer-sponsored plans. Today it's 47 percent (counting traditional pensions, tax-deferred 401(k) savings plans and others).

The mid-1980s saw a drop in the percentage of companies offering plans of all types. But in 1988, that percentage started to rise again, according to the Current Population Survey. As the work force ages, demand for retirement-savings options can only increase.

Gloom-and-doom types point to the decline in the proportion of men with retirement plans in the 1980s and early 1990s, due in part to corporate downsizing and the movement of jobs from big companies to small ones.

But coverage has greatly improved for women, because a higher proportion hold jobs. Their pensions will give retired working couples a boost (few couples in their parents' generation had double retirement incomes). It will also ease the income bind faced by many older single women.

Traditional pensions remain in decline. These plans provide workers with an income for life, the amount depending on what you earn and how long you stay at the company.

Many pension plans were terminated in the mid-1980s -- but in truth, this often was no loss. Ten years ago, many smaller plans were little more than tax shelters for doctors, lawyers and small-business owners. The benefit structure rewarded the bosses while leaving the peons with only a pittance.

The bosses lost interest when Congress changed the law to improve the peons' lot.

But there has been rapid growth in 401(k) plans and similar tax-deferred savings accounts. For the boomer generation's parents, smaller companies rarely provided any pension at all. Today, by contrast, small firms often offer 401(k) employee-savings plans, to which employers might also contribute.

The 401(k)s are especially valuable to mobile workers, because they allow you to keep your savings as you move from job to job. With classic pension plans, by contrast, you lose or diminish your benefits when you change jobs.

A well-invested 401(k) can give you a higher retirement income ++ than you'd get from a classic pension, says EBRI research associate Paul Yakabosky. To achieve that happy result, however, you have to contribute regularly and invest your money substantially in stock mutual funds for growth. Also, when you change jobs, your whole 401(k) should be rolled into a new tax-deferred plan, even if the dollar amount is small.

Here's where the boomers are falling down.

They're not always contributing to their plans. When they do, they're investing too conservatively. More than 40 percent of the money that workers contribute to their 401(k)s goes into investments that pay steady interest but don't allow their principal to grow.

And they're dipping into their 401(k) for current consumption. For workers 31 to 50, only 21 percent to 26 percent rolled all of their money from a lump-sum distribution into a new tax-deferred plan.

Even so, boomer savings look better than is generally thought. Counting the money contributed to employee plans, savings rates might actually have been higher in the 1980s than in the 1970s, Yakabosky says.

What's more, boomers started saving earlier than the older generation did. A recent poll by EBRI and The Gallup Organization found that people 35 to 54 started saving for retirement at the median age of 30. For people 55 and older, the median age was 42. Much of the seniors' present comfort came from rising government payments (Social Security, Medicare) and the unexpected rise in the value of their homes rather than from their own clever planning. So when oldsters tell boomers, "in my day, we saved," boomers are permitted a discreet "maybe."

At this point, it's unknowable whether boomers -- on average -- will maintain their current standard of living after they retire. But based on current savings trends, it's seems likely that, at the very least, they'll retire with higher real incomes and wealth than their parents had.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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