Tuesday, January 8, 2013

Not Enough Private Sector Workers are Availing Themselves of Non-Government Retirement Plans

One of the complaints we hear about defined benefit plans is about how much money public sector employees are able to retire after 20-30+ years of service.

Of course, it is theirs, the money they have contributed from their salary to their pension account. As to why people begrudge people the use of their own money is beyond us.

But what most people don’t consider is that in most cases, public sector employees don’t have a choice of whether to contribute to their retirement. The money is automatically deducted from each paycheck.

Over 20 years, that money can accumulate and grow at very good rates of return, especially if administrative/investment costs are kept low over that time period. And remember that most public sector employees start their careers at fairly low salaries and raises are usually non-existent or rare in coming, unless the employee progresses through the ranks. Requiring these workers to contribute can be painful to them when considering their monthly take home pay. They do it nonetheless.

We mention all this because a new report from the Bureau of Labor Statistics makes note of a couple of dynamics that occur in the private sector with regard to retirement benefits. These dynamics can provide some insights into why public sector employees have been successful in accumulating, over time, considerable sums for their retirement. And it can also explain why many in the private sector are woefully under-prepared for their retirement.

The September 2012 report “Beyond the Numbers: Who has benefits in private industry in 2012?” says:
Nearly two-thirds of private industry workers had access to some form of retirement plan, typically either a defined-benefit plan (such as a pension) or defined-contribution plan (such as a 401(k)), and 48 percent chose to participate in a retirement benefit plan. (See table 1.) Access to retirement plans varied significantly by major occupational group, full- or part-time status, bargaining status, and wage category. Management, professional, and related occupations had nearly twice the access rate and more than 3 times the participation rate of service occupations. (Some examples of service occupations are healthcare support, protective service, food preparation, maintenance, and personal care workers.) Similarly, full-time workers had nearly twice the access rate and 3 times the participation rate of part-time workers. Union workers showed very high access (92 percent) and participation (85 percent) rates for retirement plans.
The “problem” that manifests here is that low paid service workers, who are also likely to part-time workers, aren’t contributing to their future. It’s difficult for them to do – and they don’t. This dynamic is proven by the next statement in the BLS report:
High-wage workers (those in the top 25 percent of all wage earners, with earnings at or above $24.81 per hour) had significantly higher rates of access and participation in retirement plans than those of low-wage workers (those in the lowest 25 percent of all wage earners, with earnings at or below $10.69 per hour). High-wage workers had access rates of 85 percent and participation rates of 75 percent. In other words, 89 percent of the high-wage workers who were eligible for retirement benefits participated in the plan (known as the take-up rate), a significantly higher share than the take-up rate of 45 percent for low-wage workers. Low-wage workers seem to be at a disadvantage because they may have more difficulty providing employee contributions, which are often required to participate in a retirement plan such as a 401(k).
Of course, the great advantage that public sector employees have is that many don’t have to contribute any portion of their salary to Social Security, whereas private sector employees pay 6.2% of their pay to SS, and their employer matches that amount for them. Many police and fire department employees, and some municipal employees, don’t pay into Social Security (and can’t expect any benefits from SS in retirement). So private sector employees, especially the lower paid, would have their take home pay reduced even further by contributions to non-Social Security retirement accounts. That’s awfully hard for them to do given the cost of living these days and their need to bring as much money home as possible

Can these disparities be addressed? Yes, they can, without impoverishing public sector employees in the same manner that current policies seemingly accomplish for lower paid, part-time private sector employees.

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