This week, America is celebrating National Save for Retirement Week, established by Congress to raise public awareness about the importance of putting money aside for our golden years. For decades, traditional pensions, or defined benefit plans, have been the retirement savings tool of choice for employers in the public and private sector, and they continue to be the best way to provide the most workers with a secure retirement. Here are the top 5 reasons why pensions are best for workers, and a safe bet for taxpayers.
1. Defined benefit plans guarantee a reliable retirement benefit for life
Most Americans subscribe to the idea that if you work hard and play by the rules, you can live a dignified life in retirement. Defined benefit plans are the only retirement system that is designed to provide a regular, pre-determined benefit regardless of how long a person lives. This ensures that aging individuals can cover the cost of basic necessities such as food, housing, and health related expenses. Rather than seeing our seniors in line at food banks or rationing meals on food stamps, pensions afford people the stability and peace of mind they have worked for throughout their lives.
When politicians gut these systems, they strip the people who pay into them throughout their working lives of their hard-earned retirement security, and that broken promise can have an enormous impact. For Gwendolyn Beasley, a librarian from Detroit whose benefits were reduced and healthcare plan nixed when the city filed for bankruptcy, it meant delaying important medical procedures until she could afford the co-pay. Gwendolyn didn't cause Detroit's financial problems; it was politicians who made illegal deals with Wall Street. But when the city's finances crumbled, it was Gwendolyn and her health that suffered.
2. Defined benefit plans pool risks, are professionally managed, and yield the best returns
The scale and structure of group accounts such as defined benefit plans allows professional managers to make smarter investments that yield higher returns in the long term. That's because in group accounts, younger workers who can assume greater risks offset older workers who would otherwise opt for safer investments. In contrast, those with 401(k)-style retirement plans take safer bets on less dynamic investments as they approach retirement to ensure funds are available when they need them. A study by the National Institute on Retirement Security found that defined benefit plans are a far more cost-efficient means of providing retirement income than defined contribution plans.
3. Defined benefit plans can absorb market fluctuations
After the financial collapse of 2008, retirement systems across the spectrum took a hard hit. Public pensions are rebounding, with the vast majority returning to financial health. A recent study by the Center for Retirement Research at Boston College found that the health of defined benefit public pensions nationwide is up and expected to keep improving. The study found that pensions in 2014 were funded at 74 percent, up from 72 percent in 2012. Researchers project that funding levels will be as high as 80.5 percent by 2018.
The advantage of a pooled system is that all pension liabilities will never be due at once, so retirees can continue to receive payments during a downturn and recovery. If you were at retirement age in 2008 and vested in a 401(k) or individual market account during those years, you know how much it really does matter that a pension has time to recover.
4. Defined benefit plans attract and retain people who are committed to the long-term success of their employer
With defined benefit plans, workers have a stake in the long-term viability and growth of their employer, which gives them incentive to be more invested in their work. Defined benefit plans also encourage workers to stay the course, which means employers can also invest in worker development without the fear of losing their employees. At the same time, the sought-after stability of defined benefit plans gives employers who offer them an edge over those with less-competitive retirement savings options. That gives employers an extra chip to play when trying to recruit the best talent. In all, defined benefit plans produce a more loyal and skilled workforce.
5. Defined benefit plans are the most cost-effective retirement savings method available
The National Institute on Retirement Security has found that defined benefit plans deliver the same level of benefits as 401(k)-style plans at almost half the cost. Simply put, defined benefit plans are a better bang for the buck.
No matter which way you slice it, pensions are the most cost-effective and reliable way to provide a large number of employees with a secure retirement. So why do you hear so much about the need for pension reform? To start, there is a common misconception that traditional pensions, particularly in the public sector, are overly generous. The truth is most defined benefit plans provide retirees with a modest monthly benefit. In fact, retirees in Pennsylvania's public employee retirement system received an average of $25,889 a year in 2014, while retired Oklahoma teachers got by on $19,846.
The real story is that in recent years, right-wing ideologues like Enron-billionaire John Arnold have led a well-funded attack on defined benefit plans, pushing misinformation in order to sway policymakers toward alternatives that siphon money away from states and workers to the benefit of Wall Street.
Workers including teachers, firefighters, and police officers are the backbone of America's middle class. We can improve our economy by doing what's right for workers and for taxpayers - and that means protecting traditional pensions.