About 54 percent of private full-time wage and salary workers participated in employer-sponsored pension plans in 2003. Most participants work for large employers and are well-paid. Only about one-quarter of low-wage workers participate in pension plans.
The share of covered wage and salary workers in the private sector participating in traditional defined benefit pension plans has plummeted over the past two decades, falling from 83 percent in 1980 to 36 percent in 1999. These plans, which typically pay fixed monthly benefits throughout retirement and depend on earnings and years of service, have provided financial security at older ages for those who participated most of their careers.
The Pension Benefit Guaranty Corporation, a quasi-independent federal agency that insures benefits in traditional pension plans, is running a $23 billion deficit—the largest in its history—as increasing numbers of financially strapped employers terminate their plans and abandon their pension obligations. Taxpayers may end up footing the bill.
Most covered workers now belong to 401(k)-type plans, which function as tax-deferred retirement savings accounts to which both employees and employers generally contribute. However, more than one-quarter of all eligible workers opt out of these plans completely, including more than half of low-wage workers. Fewer than one in ten participants contribute the maximum tax-deferred amount permitted by law.
Unlike most traditional pension plans, 401(k) plans generally provide benefits in one lump-sum payment, not as annuities that make monthly payments until death. Only 10 percent of retirees ages 65 and older who had participated in 401(k) plans use their plan payouts to purchase annuities, leaving many retirees at risk of depleting their assets before they die.
Source: Key Questions for Social Security ReformUrban Institute
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