In 1975, I was working in the finance and accounting department at General Battery. It was my first job, and I loved it. But the company was in trouble. With the economy in shambles, no one was buying cars (or batteries).
At first, we renegotiated contracts with suppliers; then, we laid people off.
Finally—and I was in the room when this happened—someone said, “You know, these pensions are costing us a lot. We’re not required by law to fund them, so why don’t we stop?”
Even though I was in General Battery’s pension plan, I thought this was a great solution that would instantly improve our P&L. I was young and stupid (and many years away from retirement), so I supported freezing the pensions. I had no idea how harmful this would be to our employees. And I don’t think they knew either because I never heard any complaints.
The same thing was happening in boardrooms across America. The Employee Retirement Income Security Act (ERISA) had been enacted a year earlier, requiring employers to insure their pension plans and defining when and how they were funded, adding significantly to their cost. Although ERISA was well intended, someone overlooked that employers weren’t required to offer pension plans. The stage was set for the pension system to collapse.
This was the Big Sin.
This is when the burden of retirement shifted to you. And then came the Revenue Act of 1978. It created the “employer-sponsored” retirement plan (section 401k). Companies offering this benefit deducted part of each paycheck (specified by the employee) and provided options for self-directed investments.
These contributions were made with pretax dollars, meaning the money went into your retirement account before getting taxed. An added incentive was companies could match a portion of your contributions, but few did.
This all sounded fine and dandy. But almost no one knew what this really meant for retirement.
In 2013, the Economic Policy Institute declared the 401(k) a “poor substitute” for the previous system, and the Wall Street Journal deemed the 401(k) “oversold.”
This was the Big Lie.
We were told, “Don’t worry. This is easy. You can save for retirement yourself!” Yeah, right. You’re telling me that parents, teachers, plumbers, and healthcare workers were supposed to figure this out on their own?
Corporate pension committees typically rely on financial experts to advise them on investments. Now ordinary people were supposed to do this? It made no sense.
I was also in the room when General Battery pitched the 401(k) to employees. I didn’t sign up, not because I thought it was a bad idea but because I had school loans, car payments, and rent. Millions of Americans made the same decision. The recession of the early 1980s was raging. Nobody could afford it.
Nearly fifty years later, this is the root of our retirement crisis. After meeting with hundreds of people in my practice who had their pensions eliminated or frozen back then, I can tell you that not one understood the gravity of what had happened until they were at or near retirement.
And as if that wasn’t bad enough, when they had no idea how to handle this, they got yelled at. What do you mean you don’t understand this?!
As a result, all these years later, almost every person or couple who comes into my office for the first time ends up apologizing. They apologize for not doing a better job with their money, for not understanding investments better, and for not saving enough, even before we figure out what “enough” is for them. This is a constant, no matter how well they’ve done! They just “shoulda” all over themselves.
It’s time we get over this guilt, stop apologizing, and secure our financial futures.
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