Wish You Had A Pension?
Traditional pensions have been vanishing for private sector workers, causing untold retirement anxiety, and American workers want them back, according to a survey released today by the National Institute On Retirement Security.
Eight out of ten (81%) of those surveyed say that all workers should have access to a pension plan so they can be self-reliant in retirement. Some 84% say Americans with pensions are more likely than those without to have a secure retirement. And 58% of those without a pension say that a pension would make them feel more confident about their chances of having a secure retirement.
Too bad. Defined benefit pension plans, which provide a monthly annuity payment for life in retirement, are dead in large corporate America. But there is a revived interest in these plans among small business owners (see below).
“American workers need a pension renaissance,” says Ilana Boivie, an economist and director of programs for NIRS who wrote the issue brief. It addresses the reasons for the sharp decline in private sector defined benefit coverage (increased regulations, fewer unionized jobs), and suggests policy changes that could help reverse the trend (creating third-party sponsorship of defined benefit plans, having employees contribute to the plans, and making pension plans portable).
It’s going to be an uphill battle. In 1975, 88% of private sector workers covered in a workplace retirement plan had defined benefit coverage; by 2005, this number dropped to just 33%, according to the Center for Retirement Research at Boston College.
And the number of workers with plans continues to drop – for example, as of Jan. 1, 2011, GE is no longer offering defined benefit plan coverage for new salaried employees. (Instead, these hires will get an automatic annual employer contribution of 3% of their salary to their 401(k)s, in addition to an employer match of up to 4% of salary. They won’t get retiree health benefits either, but that’s another story.)
While the downturn in defined benefit offerings among big employers is drastic, one bright spot the report doesn’t cover is a resurgence in interest in these plans among small employers, typically under 30 employees. Actually, the most generous defined benefit plans are the ones small business folks set up for themselves. “Defined benefit pension plans for small closely held corporations are an extremely powerful way to set aside significant amounts of retirement income in very tax-advantaged way,” says Marcia Wagner, a pension and employee benefits lawyer in Boston.
Who’s a good candidate? Company owners over 50 who want to work another 10 years or so and set aside as much money as possible for themselves and their long-term workers. The catch: you have to have the cash flow to fund the plan.
Wagner recently set up a plan for a small group of neurosurgeons who didn’t feel like their 401(k) plan was going to give them enough money to retire on. The defined benefit plan works in conjunction with the 401(k), not in lieu of it.
How much you can put away is a function of many factors including your age (an actuary calculates all this), but the doctors in their 50s are generally putting away $180,000 each a year for themselves and $15,000 a year for younger staff members on a tax-deferred basis (this does wonders for their income tax liability). After 10 years, they will probably terminate the plan, and have the option of taking slightly under $2 million each (the staff members would get $150,000 each) as a lump sum or a stream of annuity payments over their lifetimes.
“People don’t do DB plans because they think they’re ugly things, but it works very much in the small marketplace,” Wagner says.
For now, if you work in corporate America and have a pension, consider yourself lucky.
Consider yourself lucky if you have any pension at all. But while some are calling for the "death of pensions," I see pensions making a comeback in the future. There will be a political push to find an affordable and practical solution to the ongoing retirement crisis, and I think it's premature to call for the end of DB plans. In fact, smart companies will be looking at ways to attract workers by provided them with a solid DB pension plan.
On this last point, Dean Baker, the economist who predicted the US housing crash long before everyone else, posted a nice piece on Monday, Public Pensions 101:
With the recent spate of attacks on climate science and evolution it should not be a surprise that traditional defined benefit pensions in the public sector are now also under attack. There are powerful political actors in this country who are anxious to build a bridge back to the 19th century; taking us to a time where working people enjoyed few protections and could not count on sharing in the gains of economic growth.
The effort to weaken or destroy public sector unions and take away their pensions is the latest battle in this larger war. As usual, the right has been busy making things up to push its agenda, confident that the media will not expose untrue claims.
At the center of the right’s story is the view that governments are somehow being reckless or irresponsible when they provide guaranteed pensions for their workers. They tell us that these guaranteed benefits will bankrupt state and local governments, imposing impossible burdens on future taxpayers.
This story can be easily shown to be untrue. While the right has been scaring the public with talk of a trillion dollars in unfunded liability in state pensions, this sum can also be expressed as about 0.2 percent of state income over the timeframe in which the liabilities will have to be paid.
In other words, if states raise 20 cents in taxes or cut 20 cents in other spending for every hundred dollars of future income, they will be able to meet their current pension obligations. This is not a trivial sum, but it doesn’t seem likely to bankrupt our youth either.
Furthermore, the vast majority of this shortfall was due to the plunge in the stock market that followed the collapse of the housing bubble. Overly generous pensions were not the problem. The problem here were the greedy Wall Street types who profited from the housing bubble and the incompetent economists who did not see it. Of course the market has recovered much of its losses, so future years’ pension reports are likely to show that most of the shortfall has already been eliminated.
But it is important to understand the basic logic of defined benefit pensions, since many are trying to eliminate them altogether. Defined benefit pensions are in effect a form of insurance. They guarantee workers a level of retirement income based on the years that they work.
This guarantee of future income is more valuable to workers than getting the same amount of money in salary since it would be very expensive for workers to buy the same insurance from the financial industry. From the standpoint of the government, the insurance is virtually costless.
State and local governments will survive into the indefinite future. If the stock market is down any given year or set of years there is little consequence for a government offering a pension fund. Of course, a down market would be devastating for an individual worker if it happens at the point where he/she retires.
This simple logic means that governments can give workers something that is of great value – a guaranteed retirement income – at very little cost. (Research shows that even after adding in pensions, health care and other benefits, public sector workers are paid slightly less than their private sector counterparts.) This means that because governments offer defined benefit pensions they can either attract better workers at the same pay, or the same quality workers at lower pay, than if they did not offer pensions. This is as basic as economics gets.
Not offering pensions would be comparable to a company that had beautiful grounds, with a lake and woods, and then telling workers that they could not use them. Obviously workers would value being able to bring their families to swim at the lake and hike through the woods.
When considering different job opportunities many workers would be willing to forego somewhat higher pay to work at a company that gave them access to such facilities. If there was little cost to the company to make its grounds available, it would just be shooting itself in the foot by closing them to its workers. This is the story with defined benefit pensions; although the issue is far more important since it involves the retirement security of workers and their families.
Most private sector workers formerly enjoyed defined benefit pensions, but these pensions in the private sector are now a fast dying relic. Rather than bring about a downward leveling by eliminating defined benefit pensions for public employees, it makes more sense to take steps to re-establish defined benefit pensions for all workers.
Defined benefit pensions did not create this economic crisis. Citigroup, Goldman Sachs and the other giant banks did. It says a lot about the state of politics that these too-big-to-fail banks seem likely to survive the crisis, while defined benefit pensions may not.
I don't agree with that last point and have discussed my views in an earlier post, The Blame Game. But there is a movement to weaken or eliminate public pensions and it's quite disconcerting. We need reforms but we don't need fear mongering and policies that make no economic sense for the long-term health of our retirement system. On that point, I completely agree with Dean Baker. Millions of people only wish they had a pension. Now is not the time to attack those that have one.