By Anthony Ogorek
Buffalo, NY – Last week I did an interview with Money Magazine about whether people with pension plans should consider changing their plans for retirement in light of the decision by IBM to cease funding its defined benefit pension plan. The reason for the interview was not to solicit comment on another standard business story; rather, IBM's decision is a signal that a generational change in personal financial security is afoot.
IBM was not the first major corporation to freeze its pension plan of late. Successful corporations such as Verizon and Motorola among others have also decided to walk away from pension plans for both employees as well as executives. What makes these decisions so significant is that they are not being made by corporations in bankruptcy; rather, they are being made by some of America's most successful, as well as well as financially strong companies.
Employees feel betrayed by corporations who promised a relatively comfortable retirement in return for years of loyal service. What we are witnessing is nothing less than the destruction of a social compact that seemed sacrosanct just a decade or two ago. Are healthy corporations terminating their pension plans in a quest for greater profits, or do their actions signal that something more profound is at work?
Since the end of World War II, employees have grown to view employers in a paternalistic light. They expected to have a lifetime relationship with their employer - even if they were no longer working for said employer. Employees abdicated personal responsibility for their retirement security, replaced by a now na ve notion that they would be taken care of for life. In hindsight, corporations made these representations to employees in an environment when America was front and center on the world stage.
Today, American corporations find themselves burdened by pension legacy costs that are chipping away at their ability to compete with foreign corporations unburdened by more retired employees than active ones. Interestingly, the fact that employees are retiring earlier than the workers of any prior generation, in addition to the benefits of corporate provided health insurance have extended retirement much further than anyone had imagined just sixty years ago.
Although the pension freezes are getting all of the publicity, unfunded health care benefits may potentially dwarf pension shortfalls. So what does all of this mean for employees? Here are some trends that we think you ignore at your peril:
1. We are witnessing the uncoupling of the social compact between employers and employees.
2. Employees will have to take more responsibility for securing their financial independence during retirement.
3. Employees will ultimately be responsible for maintaining their own health insurance.
4. Employee benefits will end with the cessation of active service, rather than over the lifetime of the employee as well as their spouse.
5. Public sector employees such as school teachers, municipal employees and public employees at the state as well as federal level will ultimately receive the same pension and health care benefits as their private sector cohorts.
6. Employers will compete for quality employees not with the promise of benefits for a lifetime, but with greater flexibility during the employees' working lifetime. These benefits include flextime, working from home, job sharing in addition to being part of virtual teams.
Change is never easy. One of the biggest mistakes workers can make is to reminisce about the way it used to be - about how they feel duped and victimized by their circumstances. In fact, the past is history - what is most important is how employees plan to change their behavior in order to succeed in this new world of employee free agency. Here are some tips for success in the future:
1. Accept that the landscape has change permanently. Things will never "get better" and it is not possible to go back to the way it was. In short, you have to get over it.
2. Start saving for your future today. You can only rely on what you have accumulated.
3. Even if you are receiving a pension as well as health care benefits from your employer, start saving to cover the possibility that your employer will be unable to fully fund your health care premiums.
4. Pay attention to your investments.
5. Do not take a job for security - take it because you love doing the work.
The future belongs to the adaptable. Remember, humans did not get to the top of the food chain by sitting in caves. Smart people change before they are forced to.
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Anthony Ogorek is principal of Ogorek Wealth Management in Amherst.