Pensions Are Dead

[Michael Jones <powderfinger99@yahoo.com>]

It is often stated that one of the three legs of retirement
security consists of a pension provided by the workers employer.
(The other two legs consisting of SS and personal savings).

If you read all the position statements from the Clinton
administration and the labor unions you will find that they
both take this 1930's view of retirement security. The 1930's
view of retirement security is based upon an expectation of
guaranteed benefits, often referred to as a "defined benefit".
Under a defined benefit plan, all the investment risk is taken
on by the employer. The benefit is calculated based upon factors
such as years of service and age.

Quietly over the past 20 years, there has been a revolution in
how companies provide retirement benefits. The trend away from
"defined benefit" plans has accelerated such that today most
assets in retirement plans are invested in defined contribution
plans (a survey from the Profit Sharing Council found that almost
75% of workers surveyed identified their retirement plan as 
a defined contribution plan, for those workers who knew what
type of plan they were enrolled in 
- http://www.psca.org/5_99data.html)

1997 was the first year that defined contribution plans overtook
defined benefit plans in total assets 
( http://www.ncpa.org/pd/economy/pd11998a.html ).

Under a defined contribution plan, workers contribute some portion
of their wages into a personal account that they own.
(Similar to the privatized accounts that SS reformers advocate).
The retirement benefit provided under a defined contribution 
plan is determined by the workers level of contributions and 
long term investment return.
 
And these plans are not just made up of 401K's, IRA's or other
accounts which are typical DCP's. 400 of the largest companies,
including AT&T, and just recently IBM, have converted their
traditional pension funds to what are called "cash balance" 
accounts. A cash balance account combines many of the features
of a traditional pension and 401K accounts. 

Under a cash balance account, the benefit is not guaranteed, only
the investment return. The worker accumulates assets in the account
defined by a formula, which typically includes factors for wage
level and age of employee.

Like 401K accounts, the worker can take their pension with them
when the leave the company. They can even roll over the pension
into a traditional IRA.

My employer offers a cash balance pension in addition to a 401K. 
Over time I have found that the pension does not perform as well
as the 401K, because the investment return, although guaranteed,
has been much lower than what stock market indices have returned.
By taking on the "risk" of these investments, my company is making
money on my pension!

Look at your company's pension closely. It might not be what
you think it is.

The changes occurring in the private sector are clear. The trend
for retirement security is towards defined contribution plans and
not defined benefit plans. When I read many of the positions
against reform which includes individual accounts, it makes me 
wonder what planet the authors are from. Perhaps they are
isolated from the real world inside a think tank somewhere. 
The private sector has  all but dumped DBP's, 
to the agreement and benefit of workers.

But, will SS reform come in time to save the current young 
workers?

Michael