Ghilarducci book I discussed yesterday<\/a>, she says, \u201cFrom the 1960s to the mid-1990s, about 75 percent of full-time American workers were covered by a pension\u201d (p. 11), but, with the advent of the 401(k), they moved their employees to 401(k) plans to cut costs, leaving employees holding the bag.<\/p>\nAfter having written about Ghilarducci\u2019s book yesterday, I thought it would be useful to give an alternate timeline of the demise of pension plans (or, strictly speaking, employer-sponsored Defined Benefit plans). \u00a0This is written largely from memory, so please excuse any small errors in fact.<\/p>\n
In Ghilarducci\u2019s paradise of DB plan generosity in the 1960s, two things were missing: \u00a0proper funding and proper accounting for those pensions.<\/p>\n
Prior to 1974, employers were not required to set aside any money for pension plans, and there were no protections for employees in the case of bankruptcy, such as the Studebaker bankruptcy in 1963, which galvanized the public, and ultimately produced ERISA, the first pension funding law, which also established the PBGC. \u00a0Good for employees, yes, because their pensions were safer, but costs for employers went up. \u00a0Later funding legislation \u2014 the DRA, TEFRA, OBRA, and most recently the PPA \u2014 increased funding requirements, especially for union plans, which had previously been underfunded because benefits tended to be increased on a flat-rate basis with each new contract, and these increases were funded over a 30 year period. \u00a0Plans were also increasingly limited in their ability to defer losses \u2014 if the stock market had a bad year, much more of the pension fund\u2019s loss had to be made up for quickly.<\/p>\n
Prior to 1987, employers were not required to account for the pension accruals their employees had earned during the year. \u00a0Instead, they recorded contributions to the pension fund. \u00a0In December 1985, FAS 87 was issued, which required that, effective 1987, employer change their accounting method to record benefit accruals, with an amortization of gains and losses. \u00a0Subsequent statements, FAS 132 and 158, changed the disclosure methodology in an effort to make the state of the plan more transparent. \u00a0And in 1990, similar accounting treatment was required for postretirement benefit plans, which had previously been recording their cash expense.<\/p>\n
Oh, and there\u2019s a third element missing from the 1960s \u201cgood old days\u201d: \u00a0pension plans were neither as generous nor as prevalent as Ghilarducci makes them out to be. \u00a0To be sure, a larger portion of the population was covered than today, but only employees at large employers had pensions in the first place; smaller firms didn\u2019t. \u00a0And at those large firms, there was no requirement that pensions vest at any given time, so employees could work for multiple decades and lose their right to a pension by leaving their job. \u00a0ERISA introduced a 10-year vesting, now down to 3 years for DC (defined contribution) plans and 5 years for DB (defined benefit or pension) plans. \u00a0She also cites 2% of pay per year of service as a typical accrual rate, but that\u2019s very high: \u00a0I think 1.5% would have been more typical, and would have included a partial offset for Social Security benefits.<\/p>\n
What\u2019s more, in those traditional pension plans, even after vesting implementation, benefits were typically based on final pay. \u00a0For a full-career employee, this was a great deal: \u00a0it was an easy-to-understand formula, of x% of pay times years of service times final (usually averaged) pay. \u00a0For a job-hopper, this was not so great: \u00a0if you managed to stay long enough to be vested, the benefit could be quite small, since it was based on your pay at the time you left the company, even if that was many decades prior to retirement. \u00a0And in terms of benefit accrual, a notionally even accrual over one\u2019s working lifetime was actually tilted in favor of older workers, whose benefit accrual in actuarial terms was much higher because of the time value of money.<\/p>\n
This meant that\u00a0there were multiple reasons for the near-disappearance of pension plans beginning in the late 1990s:<\/p>\n
Yes, employers aimed to cut costs \u2014 but not because they\u2019re ogres, but because their costs had risen and become less hidden, due to stricter funding legislation, more transparent accounting, lower discount rates, increases in longevity, and so on.<\/p>\n
Employers also became much more concerned with risk, or rather, with ensuring that the risks they took were a part of their core business and were rewarded. \u00a0Maintaining a large pension fund, subject to the vagarities of the markets, became much less acceptable, especially after the recent market crashes, and after they could no longer easily defer losses.<\/p>\n
But employers also perceived of DC plans as more attractive to employees. \u00a0After all, a young employee didn\u2019t necessarily see him or herself as staying at the company long enough to benefit from a traditional pension. \u00a0The prospect of money flowing into an account that was tangibly theirs was more attractive, or was thought to be so by the company\u2019s decision-makers. \u00a0And the 401(k) \u2014 well, that wasn\u2019t even a part of the equation\u00a0when this transition began to happen: \u00a0younger companies offered other forms of defined contribution plans, such as Money Purchase Pension Plans or profit-sharing plans, and companies transitioned from traditional DB plans to Cash Balance pension plans, in which DC-like sums of money are accrued as notional accounts within a pension plan, to provide steady accruals, rather than a large jump in benefits close to retirement.<\/p>\n
To be sure, Ellen Schultz caused quite an uproar with a series of articles at the Wall Street Journal in the late 1990s, when she wrote a series of articles, such as \u201c\u2018Cash Balance\u2019 Saves Millions, Hides Pitfalls From Workers<\/a>,\u201d from December 1998, in which she documented that, in order to provide better benefits for younger job-hoppers, accruals for older workers dropped or even vanished. \u00a0She also quoted employers (in a \u201ccaught on tape\u201d fashion, as she attended a conference where they spoke freely) using a transition to cash blance as a means of \u201chiding\u201d benefit cuts (this is from memory, sorry). \u00a0But that was never the whole picture.<\/p>\nOf course, in the here and now, very few employees have traditional pension plans; even among large private employers, prevalence has dropped (from memory) from something like 80% to maybe 25%. \u00a0And as a consequence, employees\u00a0do, indeed, bear all the investment and longevity risk, and this is a problem that needs attention.<\/p>\n
What\u2019s more,\u00a0employers have moved from \u201ctraditional DC plans\u201d in which employees received benefits no matter what, to 401(k)s in which they only receive an employer contribution if the employee contributes \u2014 for reasons that, generously, could be said to be wanting to motivate employees to save (and also include autoenrollment and auto-escalation), or, cynically, are a cost-saving measure, though employers these days have a fixed budget for retirement spending and tweak provisions within that budget. \u00a0And, incidentally, there are federal regulations that prevent favoring high-earning employees; even within 401(k) plans, employers can\u2019t just shrug off high participation by the high earners but have to ensure that a fair proportion of the benefit goes to the average earners.<\/p>\n
So, by all means, let\u2019s remind everyone that our fathers had pension benefits that we won\u2019t have. \u00a0But let\u2019s get the story straight.<\/p>\n
\u00a0<\/p>\n
Image: George Bush signs the Pension Protection Act of 2006.<\/p>\n
https:\/\/commons.wikimedia.org\/wiki\/File%3APresident_George_W._Bush_signs_the_Pension_Protection_Act.jpg; By White House photo by Kimberlee Hewitt [Public domain], via Wikimedia Commons<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"
At the very beginning of the Ghilarducci book I discussed yesterday, she says, \u201cFrom the 1960s to the mid-1990s, about 75 percent of full-time American workers were covered by a pension\u201d (p. 11), but, with the advent of the 401(k), they moved their employees to 401(k) plans to cut costs, leaving employees holding the bag. […]<\/p>\n","protected":false},"author":2209,"featured_media":4369,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[450,374],"tags":[71,25],"class_list":["post-4367","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-actuarial","category-politics","tag-pensions","tag-retirement"],"yoast_head":"\n
Why did pensions die?<\/title>\n<meta name=\"description\" content=\"At the very beginning of the Ghilarducci book I discussed yesterday, she says, "From the 1960s to the mid-1990s, about 75 percent of full-time American\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why did pensions die?\" \/>\n<meta property=\"og:description\" content=\"At the very beginning of the Ghilarducci book I discussed yesterday, she says, "From the 1960s to the mid-1990s, about 75 percent of full-time American\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html\" \/>\n<meta property=\"og:site_name\" content=\"Jane the Actuary\" \/>\n<meta property=\"article:published_time\" content=\"2016-04-20T14:15:30+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2016-08-16T15:54:44+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/wp-media.patheos.com\/blogs\/sites\/533\/2016\/04\/President_George_W._Bush_signs_the_Pension_Protection_Act.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"514\" \/>\n\t<meta property=\"og:image:height\" content=\"343\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Jane the Actuary\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Jane the Actuary\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html\",\"url\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html\",\"name\":\"Why did pensions die?\",\"isPartOf\":{\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#website\"},\"datePublished\":\"2016-04-20T14:15:30+00:00\",\"dateModified\":\"2016-08-16T15:54:44+00:00\",\"author\":{\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#\/schema\/person\/ed9b99e0bd58c5eeeebae6b82fa5a77a\"},\"description\":\"At the very beginning of the Ghilarducci book I discussed yesterday, she says, \\\"From the 1960s to the mid-1990s, about 75 percent of full-time American\",\"breadcrumb\":{\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Why did pensions die?\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#website\",\"url\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/\",\"name\":\"Jane the Actuary\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#\/schema\/person\/ed9b99e0bd58c5eeeebae6b82fa5a77a\",\"name\":\"Jane the Actuary\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/8d6a493d380e87d49599d5487691c9fc?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/8d6a493d380e87d49599d5487691c9fc?s=96&d=mm&r=g\",\"caption\":\"Jane the Actuary\"},\"url\":\"https:\/\/www.patheos.com\/blogs\/janetheactuary\/author\/actuaryjane\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Why did pensions die?","description":"At the very beginning of the Ghilarducci book I discussed yesterday, she says, \"From the 1960s to the mid-1990s, about 75 percent of full-time American","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html","og_locale":"en_US","og_type":"article","og_title":"Why did pensions die?","og_description":"At the very beginning of the Ghilarducci book I discussed yesterday, she says, \"From the 1960s to the mid-1990s, about 75 percent of full-time American","og_url":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html","og_site_name":"Jane the Actuary","article_published_time":"2016-04-20T14:15:30+00:00","article_modified_time":"2016-08-16T15:54:44+00:00","og_image":[{"width":514,"height":343,"url":"https:\/\/wp-media.patheos.com\/blogs\/sites\/533\/2016\/04\/President_George_W._Bush_signs_the_Pension_Protection_Act.jpg","type":"image\/jpeg"}],"author":"Jane the Actuary","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Jane the Actuary","Est. reading time":"6 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html","url":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html","name":"Why did pensions die?","isPartOf":{"@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#website"},"datePublished":"2016-04-20T14:15:30+00:00","dateModified":"2016-08-16T15:54:44+00:00","author":{"@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#\/schema\/person\/ed9b99e0bd58c5eeeebae6b82fa5a77a"},"description":"At the very beginning of the Ghilarducci book I discussed yesterday, she says, \"From the 1960s to the mid-1990s, about 75 percent of full-time American","breadcrumb":{"@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2016\/04\/why-did-pensions-die.html#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.patheos.com\/blogs\/janetheactuary"},{"@type":"ListItem","position":2,"name":"Why did pensions die?"}]},{"@type":"WebSite","@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#website","url":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/","name":"Jane the Actuary","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#\/schema\/person\/ed9b99e0bd58c5eeeebae6b82fa5a77a","name":"Jane the Actuary","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/8d6a493d380e87d49599d5487691c9fc?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/8d6a493d380e87d49599d5487691c9fc?s=96&d=mm&r=g","caption":"Jane the Actuary"},"url":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/author\/actuaryjane"}]}},"_links":{"self":[{"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/posts\/4367","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/users\/2209"}],"replies":[{"embeddable":true,"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/comments?post=4367"}],"version-history":[{"count":0,"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/posts\/4367\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/media\/4369"}],"wp:attachment":[{"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/media?parent=4367"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/categories?post=4367"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/wp-json\/wp\/v2\/tags?post=4367"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
![\"https:\/\/commons.wikimedia.org\/wiki\/File%3APresident_George_W._Bush_signs_the_Pension_Protection_Act.jpg;](\"https:\/\/wp-media.patheos.com\/blogs\/sites\/533\/2016\/04\/President_George_W._Bush_signs_the_Pension_Protection_Act.jpg\")
<\/a><\/p>\n