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As Congress considers legislation that could drive many employers to drop traditional pension plans, a new report shows those plans offer millions of workers their best hope for a secure retirement.
Future Retirement Income Security Needs Defined Benefit Pensions, Notre Dame economics professor Teresa Ghilarducci says defined-benefit plans, which guarantee a monthly payment amount to each retiree, provide a safer retirement than defined-contribution plans such as 401(k)s, which shift the risk of retirement savings to workers. The report was prepared for the Center for American Progress. The Bush administration has proposed legislation that would require employers with traditional defined-benefit plans to have enough money on hand now to pay benefits for all retirees and future retirees instead of being able to spread the costs over several years as is now the case. The bill is designed to help the Pension Benefit Guaranty Corporation (PBGC), the agency that insures defined-benefit plans, overcome a $23 billion deficit. But union leaders and pension experts say the legislation would create excuses for companies to back out of traditional pensions and force workers to assume more of their retirement costs. Already, several bankrupt airlines have dropped their traditional pensions, claiming they cost too much. In the first week of 2006, IBM, Sears, Verizon Communications and more than 67 other companies froze or closed their defined-benefit plans to newly hired workers. FRONTLINE reporter Hedrick Smith, who produced a PBS special on retirement, says this: Clearly, the primary motivation of companies to terminate pension plans is to save money. Since the mid-1970s, corporations have shifted much of the responsibility for pensions to employees. A recent U.S. Department of Labor study said in the 1970s employers paid 89 percent of the cost of retirement and employees 11 percent. In 2000, employees paid 51 percent and employers 49 percent. Now, people are having to pay for themselves, and it’s a horrendous situation. However, Ghilarducci says many employers continue to offer defined-benefit plans, including most Fortune 500 companies, public-sector employers and new small professional firms, schools and hospitals. Defined-benefit plans, she says, have important benefits: ...Every eligible worker is automatically covered—very significant when millions of workers do not have pensions. ...Defined-benefit plans are professionally invested, substantially reducing the risk of workers making unwise or unlucky investment decisions. ...Defined-benefit plans have a long time horizon, allowing them to ride out bad market performance and thus reducing market risk. ...Employers can use traditional pensions to attract and retain highly skilled workers. The AFL-CIO’s position on pension plans is spelled out in a resolution from its 2005 Convention. We support legislation to protect the pensions of all working Americans; to provide immediate and meaningful relief for the nation’s pension funds, including single employer and multiemployer pension plans; and to protect state and local workers from efforts to change their retirement systems from defined benefit to defined-contribution programs. Pension reform must make defined-benefit pensions more attractive to employers and more accessible to employees, Ghilarducci says. She proposes providing not-for-profit money managers for individual accounts and targeting small business coverage by urging financial institutions to develop full-service and low-cost multiemployer plans. The report also calls for Congress to bolster PBGC’s ability to provide financial assistance to encourage multiemployer plans to take on distressed single-employer plans. |
