One of my goals for the new decade is to read and I figured I could write book reviews too. Most books I read in school put me to sleep, lucky this one did not!

What I look like falling asleep in class. | Photo by Matthew Henry on Unsplash

In the first week of 2020, I read Downhill from Here: Retirement Insecurity in the Age of Inequality by Katherine S. Newman (Amazon Associates Link or borrow from library). This book was a gut wrenching read because Newman does a fantastic job at detailing real people in tough situations to make her case. If I were to summarize this book in one sentence then it would be:

Pensions are not 100% safe and income inequality has made it impossible for some people to retire comfortably if at all.

Let's break this down part by part.

Pensions

Pensions are retirement benefits that our workplace provides for us when we choose to retire. Retirement benefits are usually a combination of indefinite recurring income and health insurance until we pass away (sounds great!). To qualify for a pension, we have to work a certain number of years at the organization. In exchange for decades of loyalty, the organization will take care of us in old age.

I always thought pensions were safe and those with them were lucky. Nowadays most workplaces do not offers pensions anymore with the exception of the government. The main reason for this is because pensions are extremely expensive and do not look good on a company's balance sheet.

Companies have opted to offer 401(k)s instead where we invest our own money, which does not impact the financial health of the company. Pensions are unstable for many reasons. The two big ones are corporate greed (paying a pension to retired employees does not increase shareholder value) and running out of money (companies and cities can go bankrupt).

Newman describes the pension experience for numerous employees from United Airlines, the Detroit government, and Verizon.

Both United Airlines and Detroit have fallen on hard times in the past two decades and ultimately ended in bankruptcy. We do not need to dive into the details of a bankruptcy. The summary is that they ran out of money to pay their debts.

"By the time the bankruptcy has been fully adjudicated, United faced a $10.2 billion shortfall in its retirement obligations." (133)

Sounds bad right? Just wait until it gets worse.

"When Tim finally got the news, it was a shock: his pension was cut in half, from $30,000 a year to $15,000." (134)

Tim is just one of many who lost out on their retirement income by no fault of his own. He worked as an engineer and stayed loyal to United Airlines, but if the company has no money to pay him then he is out of luck. After retiring, many former employees can only pray when it comes to their pension.

When Detroit went bankrupt due to poor management of funds, the city was forced to reevaluate its pension for current and retired employees.

"Among the most controversial provisions of the bankruptcy settlement was the requirement that retirees pay back interest earned from their optional annuity savings fund accounts." (204)

Detroit implemented a claw back policy to have retirees pay them back which usually resulted in debt. Most retirees just did not have enough money in their bank accounts to pay back interest that has accumulated over the years.

In addition to this policy, pensioners lost health care coverage and had to accepted a 4% pension reduction with no further cost of living adjustments. Bankruptcy allows organizations to drop most of their financial responsibilities to restructure their balance sheet.

In most cases, pensions are an easy target. Unions have weakened in the past few decades and retirees are too sick and elderly. They cannot fight back against these organizations.

A bankruptcy is bad for everyone, but what about a profitable organization? At the very least profitable organizations can afford to pay their pensioners, right?

"Verizon spun off her division, the Yellow Pages, into a new company called Idearc. With that one move, Verizon removed $9.5 billion in pension-related debt from its books." (116)

Something smells fishy here. Verizon's board legally said, "We do not want to pay our retirees" and got away with it. Guess what, Idearc went bankrupt! In corporate America, it seems corporate greed trumps the needs of their loyal employees.

Retirees with a pension can potentially lose their rights to either healthcare or a monthly check, based on the needs of their previous employer, whether it is bad decisions from executives or the desire to increase shareholder value.

Who does this impact?

Generally pensions impact government employees and people who already retired or are nearing retirement.

When we lose healthcare or do not have enough money to get by every month, then there are only a few options. Most elderly people tend to come out of retirement to rejoin the workforce, albeit this is much harder than it sounds due to a mixture of age discrimination and health issues.

An elderly village woman cooking
Work never ends. | Photo by Joshua Newton / Unsplash

Some of us believe that we can work forever. What most of us do not realize is the elderly workforce are usually paid minimum wage and have a difficult time entering higher paying industries. Economists have coined this recent growth in elderly workers as Gray Labor.

"By 2000, 13 percent of people over sixty-five were working. Just fourteen years later, then number was up to 26 percent ... majority of the gray labor force was on the job full-time." (230)

We can only expect these numbers to keep rising due to longer life expectancies, lack of confident pension systems, increasing age for social security, and stagnant wage growth.

What does this mean for you?

If you have access to a 401(k) and are contributing the minimum to match in your 401(k), then it is a step in the right direction. The companies and government will not be able to touch your 401(k).

If your parents do have a pension and plan to depend on it to live comfortably, then it may impact you. The pension system is NOT a guarantee of income and health insurance. In addition, social security is expected to be reduced in 2034. Obviously most of us want to support our parents in their time of need. Like the many stories shared by Newman, children may need to step in and provide supplemental income to their parents.

Never hurts to give back to your parents. | Photo by Brandless / Unsplash

My plan for this is to save more money in my 401(k) and IRA in my earlier years so that there is time for the investments to grow. Then after my parents' retirement, I will save less for my own retirement nest egg and provide income to them.

Chances are if we are not investing in our own retirement, we will have to join the gray labor force. No one wants to work a minimum wage job just barely scrapping by with health complications.

How can we fix this for everyone?

Other than saving and investing for retirement, we need to vote for politicians that care about this issue. People in the middle and high income classes should be fine since they will have enough to save for retirement.

Go vote! | Photo by Element5 Digital / Unsplash

The low income are dealt a terrible hand since they are barely getting by on a day to day basis and it is highly unlikely they will have anything left over to save for retirement. Ultimately, we need a better Social Security system and higher incomes.

Newman suggests we follow in the footsteps of Denmark, Australia, and the Netherlands, who happen to have the best retirement systems in the world. Their governments have actively created policies to accumulate a significant treasure chest to secure a comfortable retirement.

You need to take responsibility for your financial future. The government and corporations do not care enough and there is no telling when they will start to care.

Final Thoughts

The personal stories in this book were selectively picked to paint a negative picture of our retirement system. Not all pensions are bad, but have the potential to be a negative experience. I am sure there are a good number of people who are enjoying fantastic pension benefits.

Our current retirement system (basically 401(k) and IRA) for the middle and high income classes should be more than enough to retire comfortably. Just save $500/month starting in your mid-20s and you can retire as a millionaire. The book takes jabs at 401(k)s, which seems entirely unfair.

401(k) can be great in the right hands. We need to take more ownership of our financial lives especially when it comes to retirement. Pensions are unlikely to become popular again. Organizations cannot be responsible for our retirement. We need to adapt and learn how to invest for retirement.

I was not able to cover everything in this book such as Teamsters, Two-Tiered Agreements, Utah's retirement community, retirement in Opelousas, Louisiana, and more. Downhill from Here: Retirement Insecurity in the Age of Inequality is a good read and I would encourage you to read it because the topic will impact your future.

If you want to learn more about the retirement issues that your parents are facing or ultimately you in the future, then I would recommend watching an episode on Why We Can’t Retire | Patriot Act with Hasan Minhaj | Netflix.

I'm open to book recommendations! Send them my way either in the comments below or at alan@tomoonfund.com.


Cover Image Credit: unsplash-logoAlice Pasqual

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