While pensions - technically known as defined benefit (DB) plans - were once common, they have been on the endangered species list for some time as companies continue to look for ways to cut expenses to boost profits. In 1985 nearly 90% of the Fortune 500 Top 100 companies offered DB plans to new employees. By 2010 however, that number had dwindled to 17% with remaining 83% offering only defined contribution (DC) to new hires (McFarland, 2010).
Under DC plans, such as the 401(k) plans most of us are familiar with, the employee contributes a portion their salary which is matched up to a certain level, typically 50% (up to a limit, usually something on the order of 5% of salary), by the employer. These plans transfer all of the responsibility and risk from employer to employee and are far less expensive for companies. Most employees don't know how much they need to save for retirement and most 401(K) savings accounts are woefully inadequate. An example: In order to provide even a very modest 50% retirement fund for someone making $50,000 per year (meaning $25,000 annually in retirement) over the typical 20 year span, requires something on the order of $500,000 in your 401(k).
This means that the same $50,000 wage earner must save at least 15% of that salary (assuming both a 5% employer match and a rate of return of around the same 5%). If the employer match is less than than that, and the rate of return is drops to 2 or 3 per cent, as many are predicting, you will need to save much, much more. In fact, to replace half of your income at that level of return, you will need save something on the order of 40% (Mccardle, 2010). Keep in mind that we're talking about pre-tax income. So under the 2 to 3% scenario, someone making $50,000 will need to put aside $20k for retirement. Out of the $30,000 balance, federal income and payroll taxes could take something like $8,000 and state and local taxes perhaps another $2,000. That leaves a grand total of about $20,000 in take-home pay, or just a bit over $1,500 per month, to live and perhaps raise a family. You can easily see why most folks don't save enough for retirement: They simply can't.
Another problem for DC plans is the business cycle. Most folks will have their 401(k) plan invested in a combination of equities (stocks) and securities (bonds). When these investments decline, as they did dramatically in 2007 - 2008, so does your retirement fund. When this happens, you need to save even more to reach your goal. So if your 401(k) declines by 40% - as was the case for many in 2008, you need to gain 40% just to get back to even. So you either need to boost your 40% savings rate even higher or work longer - a lot longer (at a 3% per year rate of return, it will take something like 11 years to get back to even from a 40% loss).
Between the loss of pensions and the difficulty of maintaining adequate DC retirement plans, a comfortable retirement is rapidly becoming nothing more than a dream for most Americans.
References McCardle, M. (2010). The Great Stock Myth. The Atlantic
Retrieved from http://www.theatlantic.com/magazine/...ock-myth/8178/
McFarland, B. (2010). Prevalence of Retirement Plans by Type in the Fortune 100. Retrieved from http://www.towerswatson.com/united-states/research/2106