Published: June 2006

Can You Afford to Retire?

Many experts state that the baby boomer generation is headed for a shock as it hits retirement: many boomers will be long on life expectancy but short on savings. The two main strategies for funding retirement - lifetime pensions and 401(k)-style savings plans - are in serious trouble. In "Can You Afford to Retire?" Frontline correspondent Hedrick Smith investigates this looming financial crisis and the outlook for middle-class Americans.

"Can You Afford to Retire?" is a 60 minute in-depth report on Americans' readiness for retirement. The entire program can be viewed on your computer using either Windows Media or RealPlayer. Visit the "Can You Afford to Retire?" web page.

Frontline's Hedrick Smith (The Wall Street Fix, Is Wal-Mart Good for America?) reports that the past quarter century has seen a massive shift in the cost and responsibility for retirement saving from corporations to employees. One major driver behind this shift is a corporate bankruptcy strategy that enables companies to terminate lifetime pension programs. Frontline takes viewers inside the story of United Airlines, whose bankruptcy left tens of thousands of workers with reduced pensions. The documentary reveals problems both with lifetime corporate pensions and employee contribution plans such as 401(k) programs that are projected to leave baby boomers without sufficient retirement income. The special investigation addresses this looming financial crisis and the outlook for middle class Americans.

"I think this is a crisis in the making," says Alicia Munnell, director of the Boston College Center for Retirement Research. "I think 10 or 15 years from now, people who approach their early 60s are simply not going to have enough money to retire on."

"I would say, unless you're fortunate to be in the upper-income quartiles, that you're probably going to be in for a very rough ride," adds Jack VanDerhei of the Employee Benefit Research Institute (EBRI) and Temple University. "You're not going to have sufficient monies to pay the predictable expenses - your housing, your utilities, your food - plus the potential catastrophic medical care costs."

Half of America's private sector workforce has no employer-sponsored retirement plan; among the half that does, twice as many workers have contribution plans like 401(k)s than have lifetime pensions, a complete reversal from 25 years ago. The move from lifetime pensions to 401(k) plans has meant that employees now bear much more of the cost - and risk - for saving for retirement. According to the U.S. Department of Labor, in 1978 workers put in only 11 percent of total contributions to retirement plans, while corporations put in 89 percent; by 2000, the employee share had leapt to 51 percent and the company share had fallen to 49 percent.

A major driver behind this shift is a corporate bankruptcy strategy that enables companies to terminate lifetime pension plans through Chapter 11 bankruptcy. "Chapter 11 has become an effective tool for reorganizing a business," says Elizabeth Warren, a Harvard Law School professor and specialist in bankruptcy law. "It's like a knife on the surgeon's table. Bankruptcy is the official, federal, formal way to take legal promises and just slice them off."

Robin Gilinger, a 42 year-old United flight attendant, has seen her pension drop by nearly 30 percent and her other benefits cut. Gilinger says she now expects to have to work five to 10 years longer than she originally planned. "I feel very uneasy about where I'm going to be in 20 years," Gilinger says, "And I'm afraid that I'm going to end up having to work my golden years doing things that I didn't necessarily want to be doing."

With their lifetime pensions gone, the current workers of United have joined the millions of Americans trying to save for retirement in 401(k) plans. "Most people we interviewed have no idea what it costs to replace a lifetime pension," says Frontline correspondent Hedrick Smith. "And they don't realize that as they're living longer, there is an impact on their nest egg."

To maintain their standard of living, experts say Americans will need to save 10 times their annual pay in their 401(k)s by the time they retire. That means saving 15-18 percent of their salaries, every year, over an entire career.

By this standard, most Americans are simply not saving enough. According to VanDerhei of the EBRI, the typical baby boomer is approaching retirement with only three times annual salary - enough to last seven or eight years. But with life expectancies after age 65 approaching 18 years, many retirees may be living on nothing but Social Security for a decade or more.

"The nightmare I have," says pension expert Brooks Hamilton, "is the vision of people … outliving their retirement income and being down to Social Security." And the shock waves may reverberate through the entire economy. "What holds up our economy," says Hamilton, "is consumer spending. When retirees are 20 percent of the population and run out of money, then 'poof,' there goes the economy."

The change is already happening, as retirees find they are having to go back to work to make ends meet. Pat O'Neill, a retired United Airlines mechanic, is now driving a truck after his pension and benefits were cut. Winson Crabb and Gil Thibeau, two National Semiconductor retirees with widely different financial results from their company's 401(k) plan, are both still working in retirement.

"What is the meaning of retirement if the only way you can live is to work?" asks Notre Dame professor Teresa Ghilarducci "The answer is there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It's the end of retirement."

Funding for FRONTLINE is provided by the Park Foundation and through the support of PBS viewers. Additional funding for "Can You Afford to Retire?" is provided by the Nathan Cummings Foundation. You can see Frontline on most PBS affiliated stations.

For More Information

PBS, headquartered in Arlington, Virginia, is a non–profit media enterprise owned and operated by the nation's 348 public television stations. To find PBS stations near you that carry Frontline, visit the PBS web site.

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