Tim Bradshaw knew he was entering a working world much different from that of his parents when he accepted a job more than 2 years ago with the City of Kentwood.
Unlike many of his older coworkers, he would not earn credit toward a guaranteed monthly retirement check, and “my wife and I just assume we’re not going to see a dime of Social Security,” said Bradshaw, 32.
For Gen Xers and Millennials, this is the new reality.
Defined benefit plans, once the most common form of pensions for public and private sector workers, are rapidly disappearing. So are guarantees that workers will receive generous health coverage when they retire.
“I started to see it around 10 or 15 years ago,” said Richard Block, professor emeritus of human resources and labor relations at Michigan State University. “It began with the decline in unionization, and there was less pressure on employers, and they decided one way we can save money is by shifting the burden (of retirement) onto employees.”
Private-sector employers have led the shift, with the public sector lagging behind, although the trend is accelerating among local governments in Michigan.
“I can’t think of anybody (in the private sector) who has a defined benefit plan,” said John Holmquist, a Troy attorney who specializes in public and private sector employment law.
In a defined benefit pension plan, an employer agrees to pay workers a set amount each month from the time they retire until they die, usually determined by a formula that includes that worker’s salary and years of service. In a defined contribution plan, a portion of the employee’s own salary (sometimes supplemented by the employer) is diverted toward retirement savings – usually through a 401(k) or 403(b) plan – while the worker is still active. The contributions end when the worker leaves or retires.
Most private employers have replaced their defined benefit pensions with 401(k) plans, which limit their long-term liability. Only about 30 percent of Fortune 100 companies offered new salaried employees defined benefit plans last year, compared with 90 percent as recently as 1998, according to Towers Watson & Co., a human resources consulting firm.
The move away from defined benefit plans has been slower in the public sector, Holmquist said, because unionization is higher among government workers, and unions still wield considerable influence with elected officials.
Most pensions administered by the Municipal Employees Retirement System (MERS), which handles pensions for about 800 Michigan municipalities, still are of the defined benefit variety, said Chris DeRose, the nonprofit organization’s CEO.
But he added, “I can tell you there are many who are looking at it or have shifted” to the public sector’s version of a 401(k). As of last year, 213 Michigan municipalities that belong to MERS began moving their employees into 401(k)-style plans.
Even those cities, townships and villages that still offer traditional pensions are asking employees to contribute more to their pensions or are finding other ways to cut costs, he said.
For employees, one advantage of a defined contribution plan is it allows them to change jobs more frequently without risking retirement benefits. A disadvantage is it does not guarantee the retiree a specific monthly income, since the amount of money in the fund can vary, depending on market conditions.
The shift to defined contribution plans appears to be leaving many workers far short of what they will need for retirement. While some of that may be due to losses suffered when the stock market crashed in 2008, much of it likely is because, under a defined contribution plan, an employee must be willing to save money now toward future retirement.
A 2013 survey by the Employment Benefit Research Institute found that 57 percent of U.S. workers reported less than $25,000 in total household savings and investments excluding their homes. That was up from 49 percent who reported saving less than that amount in 2008.
The survey also found that 28 percent of Americans have no confidence they will retire comfortably, the highest number in the survey’s 23-year history.
But for many young adults, the Great Recession of 2008 appears to have influenced them much as the Great Depression did their grandparents, making them more inclined to save money, rather than borrow it. Moody’s Analytics reported that adults under age 35 had a savings rate of negative 15 percent in 2006, meaning they were borrowing more than they were saving. After the 2008 global financial crisis, the savings rate for young adults increased dramatically to 5 percent, suggesting many were feeling less secure about their financial future.
Lower wages, better perks
In the past, many municipal employees were drawn to government jobs because of the generous retirement plans, though wages generally are lower than the private sector.
On average, local government employees in Michigan are paid 11.2 percent less than private sector workers with comparable levels of education, a 2010 study commissioned by the Center for Local Government Excellence and the National Institute for Retirement Security found. Even when retirement benefits are factored in, Michigan’s government employees at the state and local level still are compensated less than those in the private sector, the study concluded.
The lure of sweeter private sector jobs made it more difficult for local communities to attract the best workers, said Kurt Weiss, spokesman for the state Department of Technology, Management and Budget.
“We’re losing out in getting IT talent, because we can’t compete with the private sector,” Weiss said of technology specialists. “What we pay at the state is far below what they can get in the private sector.”
While Michigan’s private sector workforce has grown by almost 9 percent since 2009, the number of government jobs, particularly at the local level, has dropped by nearly 6 percent, according to a report released in September by the Citizens Research Council of Michigan.
Likely because of the state’s weak economy, Michigan now is home to 4 percent fewer college-educated young professionals than in 2006, according to a study by the nonprofit Michigan Future Inc.
Attracting more of those young professionals is a key to Michigan’s economic recovery, said Michigan Future President Lou Glazer.
Detroit and Grand Rapids, for instance, are each home to about 11,000 young professionals, the study found, far below Chicago’s 250,000.
“We’re not even close to the ballpark,” Glazer said. “Young professionals who go to Chicago are taking jobs that don’t offer the pensions and health care that their fathers had. That’s the new reality.”
Rather, they are looking for vibrant cities to call home. If Michigan is to compete, it must attract more young professionals, and, to do that, “it’s essential for these cities to get their financial houses in order,” Glazer said.
Tim Bradshaw, the Kentwood municipal worker, agreed that a pension and retiree health care were not high on his list when he accepted a job as a civil engineer with the city. The city matches a portion of the money he has withheld from his pay to invest in a 401(k)-like plan similar to what he he had when he worked for a private engineering firm.
He doesn’t mind that some more senior coworkers will collect guaranteed monthly pensions under the old plan, while his retirement income will be less certain.
“It’s the way the market is changing, and it’s fair,” he said. “I would rather not have the city go bankrupt.”
With a bachelor’s degree in civil engineering from Michigan State University and an MBA from the University of Michigan, Bradshaw said he is confident he will invest wisely enough to assure that he and his wife, Heather, will have a comfortable retirement.
“If we make enough money,” he said, “maybe we can retire at 55.”
Ted Roelofs contributed to this report