So I keep intending to be more proactive rather than reactive in the things I post, but — grrr — Via Meadia had a post on pensions that I can’t resist replying to via a blog post, even if only in generalities rather than a lot of specific detail, due to lack of time before I have to put on my Mom hat.
In a post labeled Defined-Benefit Proponents Strike Back, the poster links to a report by the Economic Policy Institute which (via tons of charts) describes the increasing inequality as lower-income people fall further behind in retirement savings. However, they don’t really offer any solutions; they only present the problem.
Via Media, on the other hand, speaks favorably of DC plans and disparages DB plans. Many of his/their criticisms of DB plans are mistaken: he writes of the risk employees are at when a business fails, without recognizing that the PBGC guarantees pensions in a manner similar to the FDIC protecting bank deposits. He speaks of DB plans disadvantaging workers who move frequently from job to job, but that’s a plan design issue, as traditional final average pay plans disadvantage job-hoppers, but not cash balance plans (DC-style account balance accumulation but without the investment risk and with default conversion to annuities).
Nevertheless, it’s unhelpful to discuss DB vs. DC plans — that debate is already over. In the private sector, DB plan prevalence has decreased nearly (but not quite) to nonexistence. (In the public sector, as I’ve said before, the state should not be in the business of providing any other than fully-funded externally-guaranteed pensions.)
But there are clear problems with a DC-only environment: it’s entirely reliant on employees’ and employers’ voluntary savings, and those amounts just aren’t enough for a large number of workers. Employees bear all the investment risk, and, despite all statements of the stock market being a no-lose proposition if you have proper investment allocations, employees are at a real risk, and can’t be expected to be proficient financial mangers. (It’s been shown that, on average, DB pension funds out-earn DC funds by a clear margin.) And, finally, employees have no protection against longevity risk, except to purchase an individual annuity (which, due to anti-selection, expenses, etc., is a fairly expensive way to protect against outliving one’s assets).
We need alternatives outside of the DB vs. DC structure. Ideally, we need new legislation that allowed new forms of pooled pensions, in which employees have lifetime benefits and investment risk protection with a better “value” than an insurance company’s annuity product, with the same PBGC backstop as employers have. At a minimum, we need to seriously consider mandatory retirement savings (which I keep meaning to address at length in a future post).
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