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{"id":850,"date":"2013-09-11T15:53:00","date_gmt":"2013-09-11T21:53:00","guid":{"rendered":"http:\/\/admin.patheos.com\/blogs\/janetheactuary\/2013\/09\/defined-benefit-vs-defined-contribution-some-initial-comments.html"},"modified":"2016-08-16T09:52:27","modified_gmt":"2016-08-16T15:52:27","slug":"defined-benefit-vs-defined-contribution-some-initial-comments","status":"publish","type":"post","link":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2013\/09\/defined-benefit-vs-defined-contribution-some-initial-comments.html","title":{"rendered":"Defined Benefit vs. Defined Contribution, some initial comments"},"content":{"rendered":"\n<\/head>

So I keep intending to be more proactive rather than reactive in the things I post, but \u2014 grrr \u2014 Via Meadia<\/em> had a post on pensions that I can\u2019t 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.<\/p>\n

In a post labeled Defined-Benefit Proponents Strike Back<\/a>, 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<\/a>.\u00a0 However, they don\u2019t really offer any solutions; they only present the problem.<\/p>\n

Via Media<\/em>, on the other hand, speaks favorably of DC plans and disparages DB plans.\u00a0 Many of his\/their criticisms of DB plans are mistaken:\u00a0 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.\u00a0 He speaks of DB plans disadvantaging workers who move frequently from job to job, but that\u2019s 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).<\/p>\n

Nevertheless, it\u2019s unhelpful to discuss DB vs. DC plans \u2014 that debate is already over.\u00a0 In the private sector, DB plan prevalence has decreased nearly (but not quite) to nonexistence.\u00a0 (In the public sector, as I\u2019ve said before<\/a>, the state should not be in the business of providing any other than fully-funded externally-guaranteed pensions.)<\/p>\n

But there are clear problems with a DC-only environment:\u00a0 it\u2019s entirely reliant on employees\u2019 and employers\u2019 voluntary savings, and those amounts just aren\u2019t enough for a large number of workers.\u00a0 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\u2019t be expected to be proficient financial mangers.\u00a0 (It\u2019s\u00a0been shown\u00a0that, on average, DB pension funds out-earn DC funds by a clear margin.)\u00a0 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\u2019s assets).<\/p>\n

We need alternatives outside of the DB vs. DC structure.\u00a0 Ideally, we need new legislation that allowed new forms of pooled pensions, in which employees have lifetime benefits and\u00a0investment risk protection with a better \u201cvalue\u201d than an insurance company\u2019s annuity product, with the same PBGC backstop as employers have.\u00a0 At a minimum, we need to seriously consider mandatory retirement savings (which I keep meaning to address at length in a future post).<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"