How do you prevent what has been called the looming pension crisis? According to Teresa Ghilarducci, a labour economics professor at the New School in New York City, the answer is a traditional one.I agree with Teresa Ghilarducci, the answer to the retirement crisis doesn't lie in scrapping defined-benefit plans and replacing them with defined-contribution plans. Moreover, if you look at the data, public pensions are not too generous. The problem is that private plans are completely inadequate.
Public pension funds managing traditional DB plans should do the same for new Guaranteed Retirement Accounts for private sector employees, given them the benefits of a professionally managed fund of pooled investments.
Talk about a looming pension crisis is not idle, Ghilarducci told a Nebraska audience at a recent meeting of the Government Finance Officers Association. About half of Americans working in the private sector have little retirement savings, and no pension plan on which to depend.
For them, the so-called three-legged retirement stool – pension plan, personal savings, government pension income – has collapsed, with state income the only leg remaining. This is the reality that lies behind talk of a pension crisis.
Existing savings plans like defined contribution schemes aren’t working, says Ghilarducci, coming as they do with high administration fees, market risks and a general lack of investor knowledge.
It’s all leading to a crisis built from senior poverty, people working longer, increased demand on government programs – or a combination of all these factors.
Ghilarducci, the author of ‘When I’m Sixty-Four: the Plot Against Pensions and the Plan to Save Them,’ first proposed the plan five years ago. Since then, California has begun considering it. If nothing is done to avert the looming crisis, taxpayers will end up paying more to support seniors, she warns.
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Jim Leech, President and CEO at the Ontario Teachers' Pension Plan (OTPP) recently responded to Bill Tufts' National Post article, slamming him on inaccuracies and innuendos and vigorously defending the defined-benefit model.
John Crocker, the former President and CEO at the Healthcare of Ontario Pension Plan (HOOPP) has also made the case for boosting DB pensions. Last June, ARIA published a Pensions Perspective where Crocker discussed the importance of adequacy. I quote the following:
Society has, it seems lost sight of the realities of the life cycle of employment. When people spend 30 to 40 years of their lives at work, we have a duty to ensure that they can retire with independence and dignity. Today’s seniors – most of whom enjoy a defined benefit pension plan – are among the wealthiest of all time, but that is starting to change.We live in a world that glorifies money, power and Wall Street. The problem is that the system is broken, disrupting the lives of millions as they struggle with unemployment, disability, and those that have worked are now facing a retirement nightmare as they realize their retirement income is woefully inadequate.
Senior poverty is a real possibility if these trends continue. It’s time for society to focus on the importance of adequate retirement income for our retired workers. If we don’t act now to reverse the trend away from pension coverage, we’ll be leaving – for our children – the unwanted legacy of bolstering social programs to combat senior poverty.
I have long argued that the solution to the retirement crisis is the same solution that governs education and healthcare here in Canada. Private companies need to get out of managing pensions and focus solely on running their business. Pensions must be state sponsored and managed by well governed defined-benefit plans that invest retirement monies across public and private markets.
If policymakers are going to tackle the looming retirement crisis in any meaningful way, they will first need to realize that defined-benefit plans are much better solution than defined-contribution plans when it comes to addressing the retirement income shortage and then proceed to beefing up DB plans so that workers across the public and private sector are all covered.
This solution is no panacea but it's infinitely better than the shortsighted policies that are leading millions into pension poverty. If policymakers get the governance and funding right, this will be a monumental achievement, enabling millions of workers to retire in dignity and security.
Below, Teresa Ghilarducci presents a plan for Mandatory Universal Pension System. She presented this in the second quarter of 2009. Listen carefully to her comments as she is one of the few who understands the retirement crisis and how to properly address it.