Retirement Benefits Are to White Collar Crime and Generational Inequity What Handguns Are to Street Crime

Red State, Blue State, Democrats, Republicans, anti-tax advocates, public unions, public sector, private sector, federal, state and local and even in Europe.  Retirement and old age benefits are promises about the far off future, allowing any and all to use them as a tool to rip people off and make a getaway before the heist is discovered.  At the state and local government level, all over the U.S., one finds the generations now retired or about to retire promised themselves far more than they had been willing to pay for, leading to crises of various kinds. But always there is the assumption that the older generations that created the problem and benefitted from it can’t participate in sacrifices needed to prevent disaster.

The first response is always the union-friendly choice to drastically cut the pay and benefits of new hires, in order to offset the soaring cost of benefits for those cashing in and moving out.  Screwing the millennials as part of the “screw the newbie, flee to Florida” cycle that goes on and on.  “If you don’t like it, don’t take the job; take some other job that also pays 25 percent less than the Baby Boomers were paid for the same work,” as Federal Reserve Bank of New York research has shown.

But when that isn’t enough, the next proposal is a “pension freeze.” Middle-aged workers, now mostly the last of the Boomers in those in Generation X, get to keep the pension benefits they have earned so far, but are not allowed to accrue any new benefits at the rate they were promised.  They are allowed to contribute to a 401K instead.  “If you don’t like it, quit and take another job for 15 or 20 percent less than most Boomers and members of the Silent Generation were paid, if someone will hire you.”

That’s fair, isn’t it?  No it is not!


A pension freeze is what some have proposed for the public employee pension crisis.  But I was motivated to write this post by a report of a pension freeze by luxury automaker BMW at its non-union manufacturing plant in right-to-work state South Carolina.

BMW will soon freeze pensions for its US workers, including those at the assembly plant in Spartanburg, and shift them over to so-called “defined contribution” plans, a company spokeswoman confirmed

BMW had already ceased offering pensions to new hires in 2012. This latest development means all current employees — older employees with traditional pensions and newer employees without traditional pensions — will pay into a  401(k)-like “Retirement Income Account” moving forward.

BMW workers who have already retired will not see their benefits change, company spokeswoman Mariella Kapsaskis said.

BMW CEO Harald Krüger, who does have a pension on his $2 million (€1.8 mllion) salary, told reporters March 20 at the company’s annual press event that his company employs 70,000 people in the U.S. About 11,000 people work at the BMW plant in Spartanburg, but an undisclosed number of them are temps from staffing agencies such as MAU that don’t receive BMW benefits.

That’s right, assembly line workers are now “temps” and “freelancers’ with no benefits, no stable work schedule, and required to pay both ends of the payroll tax themselves. It is happening all over the country.   But as for that $2 million CEO salary, that’s about at the global standard rather than excessive — but well below what is taken by Russian Oligarchs, and their U.S. equivalents.

Michelin froze its employees’ pensions in the U.S. and shifted all workers to a defined contribution plan in 2017, according to industry publication Modern Tire Dealer. And only 3 percent of Fortune 500 companies offered traditional pensions to its employees in 2017, compared to 49 percent in 1998, according to a 2018 report from WillisTowersWatson.

To understand why a pension freeze is unfair, and why defined benefit pensions are so beloved by public employee unions and politicians, consider some charts.  And please bear in mind that if I could draw I would probably have become an architect.  The chart compares the employer cost over the course of an employee’s career between a defined benefit pension plan (pension) and a defined contribution pension plan of reasonably equivalent value.

Pension 401K Freeze

The black line, such as it is, represents the defined benefit pension. Typically employees require ten years in the plan to be entitled to anything other than their own contributions back, with perhaps a little interest.  For those who decide to change jobs, change careers, or move to a different location, perhaps because of family reasons or marriage, the pension is a raw deal.

If there happen to be a lot of early career workers, perhaps because it is public pension in a rapidly developing suburb or a private pension for a new company or location, a disreputable company or politician could thus put very little in at first, collect a big bonus or get re-elected multiple times, and then depart.  Whereas with a defined contribution plan (401K), the company or government would have to put money in all along, money that the employee would get to take with them if they left.

In an employee stays for a long time, however, the picture changes. The cost of pension they are entitled to receive explodes as they approach the years worked and age required for full benefits.  The benefit ends up being worth vastly more than would have been accumulated with a 401K, but public unions/politicians can claim that it costs less, because of all those workers who change jobs and get little or nothing.

The late career BMW worker with a pension gave up all those extra 401K contributions the firm would have had to make, in green.  But was promised the additional money BMW would have to come up with later in their career, in blue, in exchange.

Pension 401K Freeze1a

But if the timing is bad for a pension freeze that worker, having given up all that money in dark green for a pension, never gets the money in blue either, and never gets the investment returns the money in a 401K plan would have been earning throughout their career.  They are screwed, and employer really robbed them on both ends.

So why a freeze now?  The plant opened for production in 1994, 25 years ago, and presumably ramped up over the first few years.

The first workers hired would have been at the plant for 25 years, with more probably at around 20 years – right at the point where the cost of their pensions is about to explode, assuming that 30 years of work is required for a full pension.  So BMW is kicking those workers out of the pension right at the moment when it would have started to benefit them.  They will end up far worse off than if they had been in a 401K of more or less equivalent value to a pension all along, let alone if allowed to retire with the promised pension benefit.

How about the new workers?

If you want the type of retirement that would be considered reasonable for most non-entitled non-Generation Greed people, then the experts will tell you that you’d better be saving 10 percent of your pay throughout your career.

(For the super-rich pensions that allow retirement before age 60 and decades of work-free leisure, you’d better double that percentage).

The Employee Benefits Research Institute in Washington, D.C. EBRI, as it’s called, gathered anonymous information on tens of millions of people and how they actually save. It won’t tell people what to do, but from its research there’s a pretty useful rule of thumb: Count on your fingers and …

Between you and your employer, set aside at least 10% of your paycheck. If your employer contributes 3%, then your share is at least 7%. If the company kicks in 5%, then you save at least 5%. If your employer does nothing, set aside at least 10% of each paycheck on your own.

And how much will BMW contribute to its workers’ pensions?

Highlights of the Plan include:  Free money through the Company match—BMW contributes $0.60 for every $1 you contribute, up to the first 6% per pay period. The Company match accelerates your retirement savings in the Plan.

That means if you contribute at least 6 percent, BMW puts in just 3.6 percent.  So to get to that 10 percent just to retire in their late 60s, the employee would need to put in 6.4 percent.  But I’ll bet BMW believes its workers will react to the social condition of the advertising industry, their own low wages and cost of living, and not even save, allowing the firm to put in nothing.  And, of course, the temps and contractors get nothing.

Moreover, the “defined contribution plan” is really an “undefined contribution plan.” There is nothing to prevent BMW from eliminating its contribution at any time.  Many companies have slashed or eliminated their contributions in the past when the economy is down and workers have few options.  BMW may be planning to do so in a few years, once the promised pension is in the rear view window.

Pension 401K Freeze3

In the end, in order to get the federal tax deferral 401K plans provide, an employee agrees to turn their retirement savings over to their employer who then turns it over to the financial sector.  That’s who is voting their shares for the businesses that the workers, in effect, own.  No wonder there is little opposition to soaring executive pay.  It is deals the executives negotiate with themselves.

If there were any sort of economic justice, companies would have to contribute at least 6 percent of worker pay, and perhaps 8 percent, regardless of any employee contribution, in order to be allowed to claim they had a retirement plan when recruiting workers.  It’s false advertising otherwise.   One has to wonder — what would happen to consumer spending in the economy if people actually did save 10 percent for retirement — and more for other things?

Pension 401K Freeze2

Then again, in the hands of powerful and self-interested public employee unions and the politicians they control, in places such as New York City, “defined benefit pensions” are actually “undefined benefit pensions.”  Or rather they are defined on the downside – can’t be less than what was promised – but undefined on the upside.  With retroactive pension increases from secret political deals drastically increasing what public employees get paid for work done in the past, with nothing in return.  And less well off workers, like the “temps” on the BMW assembly line, forced to accept tax increases and service cuts to pay for it.

Which is why, in many places, there is a state and local government pension crisis, leading to the sort of cuts in benefits for new hires and calls for pension freezes one sees at BMW.  Whereas in other states, there are crises due to the failure of anti-tax politicians to property fund the pensions public workers had been promised to begin with, sometimes in lieu of Social Security, which they are not entitled to receive.

Is there a retirement crisis?  This, believe it or not, is a relatively hopeful take on the question.

Szapiro:  When you dig under this–only half of people have any savings–you find that it’s a little misleading. First of all, some number of those people are going to have 90% income replacement rates or close to it from Social Security. So, we are probably not too concerned about them, at least in terms of their income replacement in retirement.

Benz: So, maybe a low level of income but nonetheless consistent with what perhaps they are earning when they are working?

Szapiro: Right. And sort of assuming that the goal of retirement security policy is to help people sustain their standard of living in retirement, Social Security does a very good job at that because it’s progressively structured at the lower end.

And you’ve got a lot of people, and it is a fairly big chunk of people, who have access to a defined-benefit plan, that they are participating in it for their whole career and they may not have anything saved for retirement or they may have a little and they forgot to tell the surveyor. And so, those people are fine. They don’t literally have any retirement savings, but the present value of the future payments of their defined benefit plan are going to be fine. And that’s going to be mostly in the public sector.

Assuming, that is, the pensions will be paid despite the fact that on average only half their present value has been funded.  And all the sacrifices needed to pay the oth4er half is born by less well off members in later born generations, in collapsing public services and soaring taxes, not the early retirees.

Benz: So, let’s talk about the groups that are particularly at risk, given what we know, and you mentioned that there are some limitations to the data. But the groups that, when you look at the data that we have, seem particularly at risk of having problems of maintaining their standards of living in retirement.

Szapiro: So, one big group is going to be people who work and work for most of their career for small employers. Small employers are much less likely to offer retirement plans than large employers. And so, a lot of these people have sort of slipped through the cracks of the system. Another large group of people who will be affected are people who have defined-benefit plans that were hard-frozen sort of halfway through their career, right, because they have a benefit that’s maybe based on the first 10 or 15 years of service. It’s not adjusted for inflation. Had they been in a defined-contribution plan, that money would be growing, but now they have to sort of start from scratch and try to fill this big gap that is left from that freeze. That’s a fair number of people.

Bingo.  Screw you, loyal BMW workers.

By the way, the first company to try to freeze pension benefits was IBM, which was hit by a lawsuit by its older workers and lost.  But when George W. Bush took the Presidency and the Republicans took Congress, firms got a green light to follow its example.  From 2003.

Are public sector workers the only people left with unions, which is why like the executive/financial class they are able to take ever more at the expense of other workers? Actually, the executive/financial class has a de facto union of its own, particularly in places such as South Carolina, which it uses to prevent the serfs from increasing their pay by changing jobs.

Non-competition and non-solicitation agreements are designed to protect employers from unfair competition by a former employee, and they are no longer just for CEOs and other highly paid professionals.

Non-compete and non-solicitation agreements are now being used for lower-wage employees such as janitors, sandwich makers and hair stylists. One out of every five workers in the United States, or approximately 30 million people, are bound by non-compete and non-solicitation agreements, according to recent surveys. Approximately 15% of U.S. workers with earnings of less than $40,000 per year also report having a non-compete.

A non-compete prevents an employee from working for an employer’s competitor or starting a competing business for a set period of time, typically between one to two years, and within a designated geographic area, such as within a city or county limit. A non-solicitation agreement is slightly different: it prevents the employee from soliciting business from the employer’s customers or soliciting the employer’s other employees to join the competitor, typically for the same time period as the non-compete.

Meanwhile, how about Social Security, our big collective 401K?

In little more than a decade, all of the “assets” of Social Security will be cashed in and added to the general national debt poorer, later-born Americans will be forced to pay off. At that point, Social Security benefits will be cut by 21 percent.

The existential risk is a reduction, not an elimination in Social Security benefits. Social Security actuaries estimate that retirees would still collect 79% of the benefits due by law, but that is cold comfort for a retiree facing an income cliff in 2035.

What no one has said that for most later-born workers, Social Security benefits are already going to be much lower than prior generations received, even without that reduction.  Consider the Federal Reserve study cited in the Wall Street Journal article linked above.

At the same ages, Gen X men working full time and who were heads of households earned 18% more than their millennial counterparts, and baby boomer men earned 27% more, when adjusting for inflation, age and other socioeconomic variables.

Among women, incomes were 12% higher for Gen Xers and 24% higher for baby boomers than for millennials, using the same measures.

So those at the back end of the Baby Boom and Gen-Xers earned less over their careers than most Boomers and the generation before, and Millennials are being paid less still.  For most of them, their Social Security benefits will already be lower because the earnings on which they were based will be lower.  Perhaps not at the bottom, because of the minimum, and not at the top, because of the maximum, but for everyone in between.

So if the typical millennial is already entitled to 25 percent less than the Boomers because they were paid that much less over their careers, and that is cut by an additional 21 percent, then their Social Security benefit only turns out to be about 60 percent as large – or 40 percent less – than a similar Boomer!

So what to do, other than shorting the cruise ship industry once my generation and the even worse generations after reach old age?.

I wrote how the Democrats have a plan to increase benefits – for those far richer Baby Boomers and other generations right now – and pay for it with a 2 percent increase in payroll taxes – with the increase phased in and deferred until the last of the 1960s generation has retired, so Generation Greed won’t have to pay it.  Just those poorer generations born later.  They’ll be forced to pay an extra 2 percent of their incomes for most of their careers, in addition to higher taxes, limiting their ability to save the 10 percent suggested – generally with little or no help from their employers.

Conservative groups have already lambasted the approach as another big government, tax and spend plan.  But if higher payroll taxes aren’t the answer then what it is?  The Dole-Moynihan plan increased the retirement age to receive maximum Social Security benefits slowly from 65 to 67 years old. The retirement age for maximum benefits today is 66. Lawmakers haven’t touched the retirement age in a generation.

That means that those my age, for whom the “full retirement age” is 67, will already get a smaller benefit that older generations retiring at the same age – plus the lower benefit due to lower average career pay, plus the 21 percent benefit cut as the Social Security trust fund runs dry.

“Increasing the retirement age is unpopular with voters,” writes Brookings Institution senior fellow Gary Burtless. “Unfortunately, so are all other reforms that would restore Social Security to solvency, including tax hikes and cuts in the formula for calculating full pensions.”  Burtless thinks the retirement age can be raised slowly, and indexed to life expectancy. Since the program first began paying monthly Social Security benefits in 1940, life expectancy for men reaching age 65 has increased nearly seven years to age 84.3, for women reaching age 65, life expectancy has increased nearly 7 years to age 86.6, according to the Social Security Administration.

That’s because those over age 60 were so much better off over their lifetimes than the generations that came before.  But now, those on the right are proposing to increase the Social Security retirement age for worse off later born generations whose life expectancy is going down while saying they are doing so because life expectancy has gone up.

And like the Democrats, the Republicans plan to raise the full retirement age slowly – so Generation Greed would be unaffected. Assuming the Millennials and Gen-X won’t realize what is being taken away from them 15 or 20 or 30 years from now.  Generation Greed gets everything it promised itself but refused to pay for, plus the Trump tax cuts.

Always those who have more, often more than they were promised, either get to keep it or take more still, while the less well off, those who have been cheated, are made worse off still.  It’s a crime.  And the crime goes on because no one stands up and talks about just how unfair things already are, and the entitlement goes unchalleged.

At least in the United States.  Over in the U.K.

The House of Lords Intergenerational Fairness and Provision Select Committee’s inquiry into intergenerational fairness has called for wide-ranging reforms to repair Britain’s intergenerational contract, including several eye-catching changes to pensioner benefits.

The committee’s findings – published on 25 April under the title “Tackling Intergenerational Unfairness” – argued strongly that today’s young adults are doing worse than either previous generations when they were at the same stage in life or today’s older adults, and that this has been driven by the shifting nature of work (particularly the decline in secure, well-paid employment) and the declining affordability of housing.

They also criticised successive governments for failing to make adequate preparations for the ageing of Britain’s population – such as reforming old-age social care funding while the system was under relatively less strain than it is today – even though the changes in Britain’s demography which are taking place have been being projected for several decades.

This report from the House of Lords Intergenerational Fairness and Provision select committee makes a number of very strong points about the extent and nature of intergenerational inequality in the UK today.   It offers an excellent overview of the debate about intergenerational fairness for anyone who would like to know more about why this issue is rising up the political agenda, and it makes a coherent set of recommendations for things that the government could do to try and ameliorate some of these inequalities.

Over there, an even bigger inequality review is being launched.  How long will all this stay under Omerta over here? Red State, Blue State, Democrats, Republicans, anti-tax advocates, public unions, public sector, private sector, federal, state and local.  They don’t want to talk about it.

Like everyone in my generation, I am finding it increasingly difficult not to be scared about the future and angry about the past.

 I am 35 years old—the oldest millennial, the first millennial—and for a decade now, I’ve been waiting for adulthood to kick in. My rent consumes nearly half my income, I haven’t had a steady job since Pluto was a planet and my savings are dwindling faster than the ice caps the baby boomers melted.

More millennials live with their parents than with roommates. We are delaying partner-marrying and house-buying and kid-having for longer than any previous generation. And, according to The Olds, our problems are all our fault: We got the wrong degree. We spend money we don’t have on things we don’t need. We still haven’t learned to code. We killed cereal and department stores and golf and napkins and lunch. Mention “millennial” to anyone over 40 and the word “entitlement” will come back at you within seconds, our own intergenerational game of Marco Polo.

This is what it feels like to be young now. Not only are we screwed, but we have to listen to lectures about our laziness and our participation trophies from the people who screwed us.

Oh yeah? Speaking as a member of the Generation Apathy that followed Generation Greed, what are you going to do about it?

The boomer-benefiting system we’ve inherited was not inevitable and it is not irreversible. There is still a choice here. For the generations ahead of us, it is whether to pass down some of the opportunities they enjoyed in their youth or to continue hoarding them.

Wrong answer.  All you’ll get is this.

6 thoughts on “Retirement Benefits Are to White Collar Crime and Generational Inequity What Handguns Are to Street Crime

  1. larrylittlefield Post author

    Google has more temps and contract workers than employees.

    This is the reality later-born generations are facing. Meanwhile, those who “worked hard all their lives” expect to get everything they promised themselves but refused to pay for. And C-suite executives, the “risk takers,” get guaranteed contracts.

    1. Stevie

      Not at all surprised by this. Even older companies like HP and Intel use a shocking number of temps in their core engineering sections, with all the constant turnover and brain drain that entails. How this saves money eludes me. Suspect workarounds of headcount restrictions for full-time positions imposed by upper level bean counters.

  2. Stevie

    Incidentally, according to Vanguard, 10% is the rock bottom minimum needed to assure a modest retirement, assuming a 40 year career. And that is for low wage earners. Higher earners must save more, at least 15%, preferably 20%, as Social Security replaces less of a higher earner’s working income. Which further assumes the stock market cooperates with at least 3% real returns. A lot of folks are going to come up short.

    1. larrylittlefield Post author

      Lets just say some of these estimates assume a lot more spending in retirement, relative to income, than we are used to at my house. Which is why we have the savings.

      Those who have the spending relative to income Vanguard assumes for those estimates don’t have the savings.

      From these inflated asset values, zero percent return after inflation and taxes looks good.

  3. Stevie

    Tactics like eliminating pensions and misclassifying workers are just more underhanded attempts to enact pay cuts, while pretending not to (like increasing health insurance premiums, copays, etc). Workers unlikely to save more to compensate (often because they can’t). I’ve often wondered how many really benefited from DB pensions back in the “good old days” given long vesting requirements, nor seen data on what percentage actually achieved coverage. Also why I doubt had such survived into the current era, whether that would matter, with average job tenure under five years. Or that longtime employees often downsized just before vesting. Curious what the Morningstar folks are smoking. So just 1/3 instead of 1/2 of folks have nothing saved for retirement? What an improvement! Seems even “good” companies can’t resist the urge to drag pay and benefits to the bottom.

    I’m not seeing much difference between non-competes for low wage employees, and those class action lawsuits against tech companies for non-poaching employee conspiracies. Just more unethical, and possibly illegal wage suppression. Does Europe allow this? I always thought interfering with livelihoods was unlawful.

    The way the millennials (and too many others) have been hosed in our economy sometimes dubbed the “hidden depression”, as retrograde policies disproportionately impact already disfavored entities, despite superficial prosperity. Sometimes I wonder if third-world status eventually awaits us all.

    1. larrylittlefield Post author

      “I’ve often wondered how many really benefited from DB pensions back in the “good old days.”

      Relatively few white males for a brief period of time. Businesses underfunded pensions, and private unions cut deals for retroactive pension increases, just as in the public sector, and as a firm’s labor force aged the pension fund was found to underfunded and the firm went out of business.

      So they passed ERISA in 1974, forcing businesses to actually fund their pension promises. So businesses eliminated the pensions. Meanwhile, a loophole allowed state and local governments to continue their misdeeds by exempting them from ERISA. Someone said at the time the result would be disaster, and here it is.

      In NYC, the disaster occurred in the 1970s. We somehow recovered. So the politicians and unions repeated all the same deals, knowing they wouldn’t be the ones to suffer the consequences.

      As for the broader trend:

      La la la-la-la they lived for today
      La la la-la-la they lived for today
      They didn’t worry about tomorrow
      They want someone else to pay.

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