Where Have All the Pensions Gone? How Are Gen X and Millennials Replacing Them?

There must be a easier way to pay all our bills at once

Pensions used to be the “norm” when you worked for an employer. You trade your hours working for a company, and in return, the company will support you during retirement. Sounds pretty good, doesn’t it?

Unfortunately, pensions are few and far between in 2024. This means that the next generations of retirees will need to plan differently.

Read on to learn why pensions are no longer offered by many employers and what Gen X and millennials are doing to replace them.

Trending Now: I’m a Financial Planner: 5 Ways Not To Spend Down Your Savings in Retirement

For You: The Surprising Way You Can Get Guaranteed Retirement Income for Life

What Happened to Pensions? 

There were no other employer-sponsored retirement plans until the 1980s. If employers wanted to offer their employees retirement benefits, they needed to fund a pension. However, this changed in 1978 with the passage of the Revenue Act of 1978, which introduced a new way to save for retirement: 401(k)s.

Over the next few decades, pensions began to phase out. After all, why would an employer continue to fund an employee’s pension solely if they could offset their costs with employee contributions? Today, 15% of private employers still have pensions in place.

“Pensions have largely disappeared because they are too risky and expensive for companies,” says Stephen Kates, CFP, Principal Financial Analyst for RetireGuide. “Pensions require employers to guarantee payments to current and future retirees for many years, which becomes harder as people live longer. The rising costs and unpredictable investment returns make it difficult for companies to maintain pensions without facing significant financial problems.”

Replacing Pensions: What Gen X and Millennials Are Doing 

Eliminating pensions does not mean Gen X and millennials are unprepared for retirement. In fact, it may be the opposite. A recent study by Transamerica Center for Retirement Studies found that 32% of millennials expect to retire before 65. However, only one-third of millennials have a written retirement plan.

It may be too early to tell how millennials will handle retirement; however, Gen X paints a clearer picture. Many Gen Xers were the first generation to see the elimination of pensions. How are they doing? Less than a quarter of Gen Xers feel very confident they will be able to retire fully.

Many Gen Xers had the rug pulled out from under them when pensions began to phase out, leaving them behind on their retirement savings. Going forward, Gen X and millennials will need to use a few key strategies when working toward retirement goals.

401(k)s

401(k)s are one of the most common avenues to save for retirement. Retirement savings in a 401(k) are generally comprised of employer and employee contributions. For example, a company might choose to match 3% of your compensation. A study by Empower found that 75% of millennials and 76% of Gen Xers have some type of 401(k) savings.

With the IRS increasing contribution limits each year for inflation and offering additional contributions for individuals over the age of 50, 401(k)s are the go-to for the next generations of workers.

“Alternatives like 401(k) plans are easier for companies to manage and shift the investment risk to employees,” says Kates. “These plans are also portable, meaning employees can take their retirement savings with them when they change jobs. This is a benefit for both employees, who can take more control of their career, and employers, who don’t have to worry about large and risky pension liabilities.”

IRAs

Individual retirement accounts were created in 1974 to help employees without pensions save for retirement. Their popularity began to grow after the introduction of the 401(k). To this day, IRAs are a common retirement planning strategy used by millennials and Gen Xers. From 2016 to 2022, the use of Roth IRAs grew from 6.6% to 19.2%.

Taxable Brokerage Accounts 

The rise of the internet opened the door to new retirement savings opportunities for millennials and Gen Xers. The first full-service electronic consumer equity trading system opened in 1982; however, the accessibility of stock trading didn’t go into effect until the early 2000s with the help of the internet.

Today, many millennials and Gen Xers hold funds in a taxable brokerage account through platforms like Charles Schwab and Fidelity. Using a taxable brokerage account gives millennials and Gen Xers flexibility with their money, as it isn’t locked up until age 59 ½.

Housing

The last way millennials and Gen Xers are saving for retirement is through housing, which directly impacts their cost of living. Gen Xers, who bought their homes decades ago, are in a better position than millennials, who struggle to afford the cost of taking out new debt. The median new home price in 1983 was $75,300. Jump to 2023, and the median home price is $416,100.

This requires millennials to be creative with housing, and concepts like house hacking are gaining popularity. Many millennial homebuyers support house hacking, which occurs when someone purchases a home and rents out other units or bedrooms to lower their costs and earn extra income.

The Bottom Line

The elimination of pensions undoubtedly impacts millennials and Gen Xers. Nevertheless, retirement doesn’t have to be a lofty dream. Instead, millennials and Gen Xers need to adapt to new market conditions and find ways to leverage other types of savings accounts, like IRAs and taxable brokerage accounts.

More From GOBankingRates

This article originally appeared on GOBankingRates.com: Where Have All the Pensions Gone? How Are Gen X and Millennials Replacing Them?