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Savings beat out pensions

By Jennie L. Phipps · Bankrate.com
Sunday, November 21, 2010
Posted: 10 am ET

I live in Detroit where practically everybody I know is entitled to a big pension. As someone who has been self-employed for the last 14 years, a substantial pension paycheck isn't part of my retirement planning, and frankly, I've been a little jealous.

According to a report from Investment Company Institute, my envy is misplaced. Having a private retirement plan has never been as common as it seemed. Plus, diligent savings in a defined contribution plan is, on average, much more lucrative than the payout from a defined benefit plan.

ICI's report makes these points:

  • Among retirees with private-sector retirement plan income, the median amount of income received per person in 2009 was $6,000, compared with about $4,500 in 2009 dollars in 1975.
  • In 1975, when nearly 90 percent of private-sector workers with retirement plans were covered by defined benefit pension plans, only 20 percent of retirees ever received any money from the plans because of vesting rules, timing of benefit accrual,  job changes and plans that were insolvent.

The biggest payday -- even for high earners -- comes from Social Security, the report says. In 2009, Social Security benefits were 58 percent of total retiree income and more than 85 percent of income for the 40  percent of retirees who earned the least during their working years. Even for retirees in the highest income segment, Social Security benefits represented more than 33 percent of income in 2009. Over the past 35 years, the share of retiree income from Social Security has averaged 53 percent.

Merton Bernstein, Professor Emeritus at Washington University in St. Louis School of Law, recently wrote in the Huffington Post that raising the retirement age would be a costly mistake. He argued that cutting Social Security would reduce the purchasing power of older Americans and eliminate the jobs that are created by the money they spend.

Instead of pushing up the retirement age, Bernstein calls for more emphasis on education so that "further technological advances will enhance the production of goods and services, increase work incomes and thereby enlarge Social Security funding," he says.

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