Private pension downfalls of recent years aren’t only plaguing private companies and employees, but the federal government, prompting a group of retirement policy experts to gather in Washington, D.C. yesterday to discuss possible solutions, including re-imagining what the defined benefit plan could look like.
The solutions ranged from borrowing the Netherlands system of a collective pool to an adjustable pension plan where investment performance and risk is shared by employers and employees.
Publicly traded companies face a combined pension shortfall of $458 billion, according to a recent report by the bank Credit Suisse. Many corporate pension plan sponsors face a significant increase in pension contributions and expenses in 2012, adversely affecting competitiveness, investment and job growth and possibly creating a further drag on corporate earnings and cash flow.
“The nation is caught in a retirement trap of its own making,” said Richard Shea, a senior partner with Covington & Burling’s employee benefits and executive compensation practice. “Existing arrangements are doing a good job in many cases, but we need more options to deal with those cases where the current system is failing us.”
From 1980 to 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38% to 20%. In contrast, the percentage of workers covered by a defined contribution pension plan has been increasing over time. From 1980 to 2008, the proportion of private wage and salary workers participating in only DC plans increased from 8% to 31%. The panel said the decrease of pension plans was largely to do an overly regulated market and volatility. The solution may lay in including DB features in DC plans.
“Traditional pension plans impose all of the risks on the employer, and 401(k) plans, while an important source of retirement savings, place all the risk on the employee,” said Karen Friedman, executive vice president and policy director for the Pension Rights Center. “Solutions that share and reduce those risks, and that provide better benefits throughout retirement will help to increase retirement security.”
The private retirement system hasn’t gotten much attention, largely due to the state and federal crisis with government-run retirement plans and the shortfalls it faces. One panelist suggested that instead of overhauling private pensions, Social Security could be strengthened.
“People aren’t putting in voluntarily; we need a system to make them put it in, something portable with a guaranteed benefit, realistic investment assumptions and that deals with longevity risk. For anyone, do we have something like that? We have something like that, but the benefit levels aren’t high enough, we don’t put enough money in,” said Damon Silvers, policy director and special counsel at AFL-CIO, referring to Social security. “It’s a lot simpler than most of what we’re talking about.”
But revising Social Security will not likely happen in this election season with pushes by the GOP to increase the age to receive benefits. Instead, one panelist suggested, private retirement funds should be amended to attract participants and employers, rather than push them away.
“The world of pensions has gotten to the point where it is sufficiently complicated that many businesses don’t want to deal with it at all. We in the government have made it complicated; we’ve repeatedly said that if you offer a pension plan you have to do this, this and this,” said Joshua Gotbaum of the Pension Benefit Guaranty Corporation. As requirements have been made tougher, businesses have moved from DB plans to DC plans. “If employers want to take burdens off employees they have to go through additional hoops, and the consequences of that is that they’re saying ‘I’ve had enough, I’m getting out.’”
The consequence of this and other economic factors is that one-fourth of Americans do not have a retirement plan, according to a member of the Senate HELP committee. Shea and other panel members are trying to shift the focus back on to corporate retirement plans.
“Private pension reform has to become part of the policy agenda, and a lot of the pension reforms in recent years have tinkered around the edges. At the end of the day most people go into retirement with little in the way of protection, which is why this has to be changed,” said Shea.
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