“It’s tough to make predictions, especially about the future.” — Yogi Berra
A few years ago, Utah lawmakers revised the state’s pension system for public employees, shifting from a traditional defined benefits approach to one favoring matching contributions to 401(k) accounts. At the time, legislators predicted the move would reduce state expenses to a manageable level while giving workers a viable method of planning for their retirement.
State expenses have been reduced and will continue to subside, but as for the prediction that workers would make up for the loss of pension benefits by contributing more of their earnings to retirement plans, so far, not so good.
Economists looking into the effects of pension reforms after the 2008 financial crisis focused on the experience in Utah, and found that adverse effects of the changes include higher employee turnover and a diminishment in financial preparedness among public workers facing retirement. The reform effort, of course, was aimed at ensuring the solvency of state-funded retirement programs that in the aftermath of the 2008 crisis were headed toward bankruptcy. In hindsight, the reform was the right thing to do, though the impact on individual retirement plans is troubling.
Let’s be clear, it isn’t the state’s fault the majority of its employees have chosen to assign retirement saving a low priority. But it will be the state’s problem if large numbers of retirees end up becoming dependent on public assistance programs, which seems more and more likely.
The reform measure gives employees hired after 2011 a choice of participating in a less-generous defined benefits program or a hybrid program with some defined benefits as well as matching contributions to personal retirement accounts. After a year, employees who fail to make a choice are automatically enrolled in the hybrid plan, and data compiled by the National Bureau of Economic Research show that 60 percent of employees were put in the default plan, indicating a prevailing apathy about retirement savings. And indeed, among those who failed to make a choice, very few have chosen to make maximum contributions.
The numbers mirror several other studies that have shown the majority of working Americans are under-saving for retirement and more than half of those over 55 years old have saved virtually no money. The problem isn’t that public and private employers aren’t making money available to workers for their retirement, it’s that workers aren’t taking advantage of savings programs and are leaving huge amounts of money on the table, jeopardizing their ability to retire at all, let alone in relative comfort.
This is a problem that will have serious negative consequences. Having vast numbers of aging citizens unable to pay for their living expenses is both a public and personal problem. Some large employers are beginning to recognize the seriousness of the consequences and are bolstering matching and defined benefits programs.
The state of Utah should look for ways to encourage more of its employees to take advantage of savings programs, even if it includes making future pay increases contingent upon employees agreeing to put extra cash away in a savings account. The current trends make it clear that some kind of assertive policy changes will be necessary to avoid a bleak and sobering future for many retirees — a prediction now unfortunately not too tough to make.