Every tax season, I encounter many clients with similar problems. A common issue is their inability to afford retirement. Many of my clients do not even have a retirement plan. AARP has found in their latest research that over 60% of older adults are unsure whether they will be able to have enough money for retirement. While we could argue it is their fault for their lack of retirement planning, the reality is that millions of retirees find themselves in a similar situation every day. Even with the existing retirement plans and financial products available, the cost of living makes almost impossible for someone earning an average income to save for retirement. Several studies point to similar findings. A survey conducted by the Pew Research Center found almost 40% of participants do not believe they will have enough income and assets for their retirement. This represents an increase from 25% surveyed a year earlier. Another study conducted by Gallup found 71% of adults are at least moderately worried they will not have enough assets to enjoy a comfortable retirement, which includes 42% who expressed very worried about retirement. To make things worse, many people rely on social security as part of their retirement plans. However, the financial status of the Social Security Administration (SSA) is precarious as the SSA’s report “Actuarial Status of the Social Security Trust Funds” indicates that Social Security funds will begin to run out by year 2034.
The latest Mercer CFA Institute Global Pension Index shows U.S. came in 22nd place out of 47 countries, which is even a lower score than the year before. One would wonder how it is possible the United States, a developed nation and perhaps, deemed by many as the most powerful country in the world, provides so poor means of financial retirement to its citizens. The study’s first recommendation was to provide a “safety net” pension for all. I would like to take this one step further and recommend the private sector to be accountable for this safety net. Prior to 1980s, it was common for corporations to provide defined benefit plans (aka traditional pensions) to their employees. Defined benefit plans provided guaranteed retirement benefits to employees as employers contributed to pension plan assets to fund the retirement payouts. A downside of defined benefit plans is that employers borne the risk if pension plan assets were not sufficient to provide for the retirement benefits. As corporations focused on improving their financial performance, labor costs have been increasingly passed to the employees resulting in defined contribution plans (e.g., 401K). On this type of plan, employees borne the risk if retirement assets are not sufficient to provide for their retirement benefits. Furthermore, almost half of American workers have no even access to retirement plans at work.
Interestingly, corporations have been putting more emphasis on sustainability over the last ten years. This trend was a natural move as more stakeholders have been expressing concerns for the environment. A framework known as ESG, which stands for environmental, social and governance, has become widely popular as it represents a more inclusive way to address other key issues beyond sustainability. The social dimension addresses the relationship between a corporation and the community and includes a variety of elements including diversity, inclusion, and labor relations. Common measures in this area include CEO-to-employee compensation ratio, percentage of diverse employees at various levels and fair wages. However, this social dimension fails to capture issues employees may face once they no longer work for the company. I am referring to retirees. While retirees are no longer employed by a company, they were once employees and as such, corporations’ social concerns should extend their interests and commitment to current and former employees. In addition, corporations should take note that these individuals, even if no longer working for them, may become their customers and as such, retirees represent key stakeholders in their community.
Furthermore, the Business Roundtable, a non-profit association whose membership consists of solely chief executive officers from major U.S. corporations, issued the Statement on the Purpose of a Corporation in 2019. Such statement was inspired on the struggles many Americans are facing as the standards of living have not kept up with the pace of change in the economy. The Statement, which was signed by 181 CEOs, redefined the purpose of a corporation to put the interests of employees, customers, suppliers and communities on par with those from the shareholders. The Statement listed five fundamental commitments, including investing in employees by providing fair compensation and important benefits. Financial security, once employees are enjoying their retirement years is, perhaps one of the most important benefits that a company can provide to its workers.
U.S. corporate profits have shown an impressive growth since the 1980s with an annual growth rate of 1.5% and 9.8% in 2022 and 2023 respectively. There is definitely room to provide better retirement choices to their employees. My call for action to Corporate America is twofold. First, to offer some sort of retirement plan to all employees and second, to bring back traditional pension plans. While this option may be more expensive, it will bring the peace of mind their employees deserve as they enter into retirement.
