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THERE’S A SAYING that “perception is reality,” meaning that what you believe is your reality, whether it’s true or not. Changing our perception isn’t easy. It takes effort, along with a willingness to discover and accept facts.
Many Americans’ perceptions are incorrect, leading them to make subpar financial decisions. Consider:
Recently, I was in a coffee shop when a worker from my old employer came in. I recognized the logo on his hard hat and struck up a conversation. “How are things at the company?” I asked. “Pretty bad” was his reply. He asked where I’d worked. I told him I’d been in the main office and had been in charge of employee benefits.
Then I took a big risk and asked how he liked his employee benefits program. “It stinks,” he replied. I should have stopped there, but I pressed on.
I’m the person who installed a new benefits program at the company in 1996, which was the year this man was hired. The program is different from that enjoyed by longer-tenured workers, which I also mentioned. His response was quick and to the point— “you suck”—though said with a smile on his face.
Back in 1996, we were trying to lower costs and liabilities without reducing benefits for longer-time workers. A two-tiered scheme worked for several years. But when the majority of workers had the new plan, older workers became a target of envy. The company broke various commitments made to long-term workers and retirees, and reduced their benefits anyway. Still, longer-tenured workers continue to have a traditional defined benefit pension, plus company-subsidized retiree health benefits.
My new friend claimed that, because of me, he and his fellow post-1996 employees would be on welfare when they retired. That’s his perception. But it isn’t reality. In truth, he has a cash-balance pension, plus a 401(k) with an employer match. He wasn’t impressed when I explained he had it better than about 85% of U.S. private sector workers. His perception went no further than comparing his situation to that of longer-tenured workers still in the pre-1996 plans.
He went into detail about his complaints. He had only $1.1 million in his 401(k). He’d had $1.3 million last year and he blamed the company for the decline. Go figure. According to him, his cash balance plan was worth “nothing,” which turned out to be $126,000, and that sum will be even higher by the time he retires.
His pay as a union worker, including overtime, is $160,000 a year. I said, “Gee, that’s twice the median household income in the United States.” He ignored me. Nevertheless, his perception is that, in a few years, he’s heading for the welfare rolls—because of me.
The changes made at the company nearly three decades ago also eliminated health benefits for future retirees. That was a big liability for the company. Since then, the Affordable Care Act came along, so many early retirees will receive government subsidies and have more health insurance choices. He also has a health account, plus the company makes modest annual payments to a retiree medical fund that workers can tap in retirement.
He claimed to be paying $330 per week for health insurance for his family. That seemed high to me, but I confirmed it was true. Here’s the thing, though: Like many people, he equates the cost of premiums with his plan’s value. That’s often a big mistake.
In this case, his selection is an option that has become so expensive the company is eliminating it next year. The plan is subject to adverse selection—sicker people choose it because of its generous benefits—and that results in higher premiums. Once again, his perception of better coverage has gotten in the way of reality, and it’s costing him money.
I’m back in that coffee shop today. I’m hoping the guy doesn’t return with a cadre of his fellow workers.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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I have to take issue with the first bullet: “Social Security. Nobody stole the trust fund, it’s not going broke and, yes, it will be there for you.”
The official report of the Social Security Administration Summary: Actuarial Status of the Social Security Trust Funds (ssa.gov) notes that by 2034 the trust fund will be exhausted. In addition, over the 75-year period, Social Security taxes will only fund 74% of the promised payouts.
The bottom line is that unless there are major changes (i.e. large tax increases), Social Security will not be there for me at the current level of payouts. I fully expect that my benefits will be lower than yours.
That is not going broke. Yes that’s what the Trustees say and have been saying for years.
Do you really think any politician will allow 60 plus million voting seniors take a 26% cut in their income? No way!
Regardless of the compensation/benefits, it is human nature to complain. I worked for a company that had the best pay/benefits, but you would not know it from the grumbling of the staff. Just human nature I guess.
It was understood that one had the freedom to work elsewhere if one was unsatisfied with their pay/benefits, but all understood, but would never admit it, that they have a a better deal with their current employment than they would find elsewhere. So best to stay put and whine..
Two tier benefit plans are understandable but inherently divide staff, better to cut everyone’s benefits rather than shaft the young in my opinion.
Yes Anthony, my last job had a wonderful pension which is one reason I joined in 2004. It was based on a function of your years of service and the average of the 5 highest years earnings up to 75% at 30 years. Looking at the numbers it didn’t seem to be sustainable. Correct, as in 2011 they had to lower the payouts for anyone hired after then. Lots of dissension amongst the divided workers was the result.
Finally the fund gained enough to double the benefit of the lesser paid, post 2011 folks. A fellow I used to work with jumped to retire, way before he should have saying “I think I’ll make it until Social Security is available.” He is probably like the fellow Sir Richard encountered and is miffed at how low his income is now.
Nice article, thanks for sharing as always. Nevertheless, I must object to your characterizations of people’s alleged false “perceptions” about SS and Medicare. You say: Social Security is not going broke; and Medicare is not socialized.
I have a lot of experience with bankruptcy. Every time someone or a business filed bankruptcy it was because they couldn’t pay their bills. SS literally sends out written statements saying that it will soon not be able to pay its bills. That’s what going broke is.
The key characteristic of socialism is: from each according to his ability to each according to his need. The enormous federal government decided that old people have a need for healthcare and they would (by force) take money from people who were able to pay for it. That’s what socialism is: take money or property from one to give to someone else.
I said Medicare was not socialized medicine and it is not, it’s a universal insurance system and is not directly involved in your health care.
Last I looked everyone pays equally for Medicare Part A, nobody is forced to take Part B or D. Your argument can be applied to just about anything government does. Why should individuals without children pay taxes for schools or without a car taxes for roads, etc. Very simple, some things are for the common good. Hey, people who drive EVs use roads but don’t pay fuel taxes.
SS is not going broke even in the worst case, but to scare seniors by saying so is irresponsible IMO. Earned benefits will never not be paid.
Unless you have been a public employee as I was in a previous career. My pension from that will be very small. In my current job I pay the _maximum_ into social security. However because I was a public employee the Windfall Elimination Provision dictates that my Social Security pension will be cut by up to 45%. That is money that I have already paid into Social Security that I will not be paid.
You are confusing communism and socialism.
Agree.
Communism is commonly summarized by the Karl Marx slogan, “From each according to his ability, to each according to his needs,” and was believed by Marx to be the step beyond socialism. Individual private ownership is illegal in most communist countries.
https://www.britannica.com/story/pro-and-con-socialism-in-the-united-states#:~:text=Capitalism%2C%20the%20United%20States'%20current,economy%20or%20free%20enterprise%20economy.
One’s perspective is so interesting. This person’s financial numbers are similar to mine at retirement, except my cash balance pension was about 20% lower. However at retirement as an allied health professional with a Masters degree at my highest I never made half of what he made. My wife, also an Allied Health Professional and I combined never made close to what he is making. Despite this we retired with our house paid off, paid for our daughter’s college education, and pay cash for our new cars. We travel extensively as well. As you constantly point out Dick it’s all about how you save vs spend your money.
Richard, I’m thinkin’ the first lesson they ought to teach you in HR101 is never tell anyone that you’re the HR guy. I’ve actually witnessed everything you mention but from the other side of the table. You have my empathy.
Good point, but had an urge to learn. Now I know how long feelings can last.
Psychologist John Adams’ equity theory has been shown to have a powerful influence on employee motivation and job satisfaction. Equity theory posits that motivation is more a function of our perception of how we are rewarded relative to others than it is by the absolute amount of our reward.
Classic examples invoking equity theory are CEOs and athletes with multimillion dollar contracts who become very upset about their compensation when they find out another CEO or athlete just received a pay raise that bumped them ahead of their compensation.
Your union friend’s dissatsfaction clearly comes from his view that it is inequitable that he can’t receive the same benefits as his pre-1996 coworkers despite his perception that his contributions to the company are every bit as good as theirs.
It’s even deeper than that. He told me when working with a crew if one guy has the old package they make him do the hard, dirty work, because he has a pension and can afford to retire.m
Interesting encounter and article. Always easier to blame someone else, especially when it’s the system, the man, the company, the government, etc.
At Delphi Automotive, our 401k match was given in company stock, and a portion of our own contribution had to be in company stock (with a certain holding period before transferring to other investments). When the company went bankrupt in 2005, that stock’s value went to zero, so in that case, it really was the company’s fault when our 401k’s took a hit. But, we salaried employees still had our pensions, which we retained when Delphi was spun off from GM in 1999. Those hired prior to 1992 also had the promise of health insurance during retirement, but that was taken away.
Then, when GM went bankrupt in 2009, the federal government swooped in to save GM’s salaried pension, GM’s hourly pension, and Delphi’s hourly pension, with only the Delphi Salaried employees left to twist in the wind. The salaried pension plan was turned over to the PBGC even though it was 85%-funded and much better off than plans that weren’t confiscated.
One weird thing about the stock going to zero…many of us held on to the nearly worthless stock thinking that there was a small chance it could bounce back, and for “a penny on the dollar” it wasn’t worth cashing in. However, in our 401ks, we discovered that we didn’t really own the stock but a “comingled fund which contained the stock plus some cash. The plan cashed out all our almost worthless stock as their “fiduciary duty,” so we got some pocket change but lost out on any recovery (although it did not).
When Delphi finally came out of bankruptcy after four years, their 401k included a “brokerage window” where one could invest in any of various assets–EXCEPT Delphi stock.
Luckily for some of us, we learned from authors like (then “Wall Street Journal”) Jonathan Clements, and putting money into an SP500 Index fund every paycheck, through its ups and downs, worked out pretty well over a 30+ year career. That’s in spite of losing a big chunk in company stock.
After the Enron fiasco many employers stopped matching in company stock, including mine. Strange a 85% funded plan was defaulted to PBGC, but I suspect most of accrued pensions were paid.
Well, the accrued pensions were “paid,” but at a fraction of what had been earned over decades or work (like 40%).
The fact that a well-funded pension plan was forced by the federal government to be turned over to the PBGC has been the subject of 14 years of the Delphi Salaried Retirees Association petitioning the government for redress. It was unprecedented for the government to force that action outside the accounting rules that would normally have justified it.
It’s a shame the worker has allowed himself to be blinded to the blessings he has in his 401(k) and pension. Envy is a strong emotion, and it’s wrestled away some of his happiness. It’s good he has a protected job. If he had to fend for himself in the general economy, I suspect his attitude would not attract much wealth.
I suspect you are right, but I read a similar attitude from other workers on my old company FB groups.
Interesting article, Dick. I was struck by the wide disparity between your new friend’s 401(k) and pension balances. He must have been a pretty diligent saver to have become a 401(k) millionaire so quickly. What kind of a match does he get? The pension, by comparison, does seem a bit paltry for a 27 year employee.
It does seem low, but it is a cash balance plan with employer contributions heavily backloaded. When I put it in company contributions were based on base and OT pay and since it was changed to base pay only. This guy was so convinced he was a victim I wouldn’t doubt his numbers were off.
If he was socking away the max contribution it’s possible to have the million in 27 years. We had one guy accumulate a million in two years. He was day trading between international funds and the GIC fund – until the mutual funds made us amend the plan to limit such trading.
My brother used a similar scheme back in the 90s. He noticed that when the US market went up sharply, the Japanese market would follow suit when it opened 5 hours after the US market closed. You could make changes in your 401K up the 4 PM deadline, effective the next day.
So when the Dow was up 400 points, everything went into the Japan fund for one day. He made about $2 million in two years, before the company found out and made him stop. But they didn’t make him give the money back!
So he just started investing in regular stock funds with his $2 million, and did very, very well. He retired in 2015 at age 58.
We had a similar situation. Our guy got divorced and had to give half to the ex, but he gain the million back in about a year until we had to put a 90 day transfer wait on certain funds.
I wish I had figured all that out.