Old-fashioned pensions have been disappearing from the benefits landscape for decades, but has that been bad for workers? Not necessarily.
At least, that is the opinion of an often overlooked group of retirement-security experts. They argue that most defined-benefit plans that pay retirees a guaranteed amount of money every month for the rest of their lives were never very generous for most workers.
To be sure, those pensions tend to work well for highly compensated employees and people who stay with the same employer most of their careers. But many workers have not been so lucky, mainly because high pay and lengthy tenure have always been more the exception than the rule.
“Largely, there has been this notion that in the good old days, people did not change jobs much,” said Dallas L. Salisbury, president and chief executive of the Employee Benefits Research Institute (EBRI). “But for the overall labor force, that is bunk.”
For men 55 to 64, median job tenure peaked at 15.3 years in 1983, according to the institute. Now, median tenure for men approaching retirement is less than 11 years. For women in that age group, median tenure is 10 years, an all-time high. All of that has made for more bad pensions than many people remember.
In 1975, when nine of 10 private-sector workers with retirement plans were covered by defined-benefit plans, only about one in five ended up receiving any income from them, according to the Investment Company Institute (ICI), which represents the mutual fund industry. And the pensions those lucky few received were often puny: The median was $4,700 a year, in 2011 dollars.
“Conventional wisdom would have you believe that there was once a ‘golden age of the golden watch,’ when most American workers were covered by defined-benefit pension plans — and that private-sector retirement benefits have declined since that time,” Paul Schott Stevens, ICI’s president and chief executive, said during a September speech.
“In fact, the share of retirees who receive retirement income from private-sector plans rose by almost half from 1975 to 2010, from 21 percent to 31 percent. And the median benefit rose by almost one-third, after adjusting for inflation, thanks to both improvements in [defined-benefit] pensions and the growth of 401(k) plans,” Stevens added.
Obviously, ICI has a vested interest because member firms manage many of the 401(k) and other defined-contribution plans that are replacing traditional pensions. But its position is shared by the non-aligned EBRI and other researchers.
None of this suggests that traditional pensions are a bad thing. The payouts have improved since 1975, largely because of more robust federal regulation. Just over a quarter of people 60 or older received a traditional pension in 2010, and the median payout was $14,400 a year, according to the National Institute on Retirement Security. But the same regulations that improved pension payouts are contributing to the decision of many employers to drop the plans. Fewer than one in five private-sector workers now are covered by them.
Now, with Social Security in the crosshairs of lawmakers looking to trim entitlement benefits as part of a plan to address the nation’s long-term debt, the challenge confronting policymakers is coming up with a retirement vehicle that both makes sense for a mobile workforce and encourages workers to put aside enough money for retirement. Some policymakers are exploring pension-type accounts that would be set up by governments and fed by contributions from employers and workers.
In theory, at least, 401(k)s and other defined-contribution plans could also do the trick, even if they put the risk of bad investment returns squarely on the shoulders of workers. But for those plans to work best, workers would have — many of whom feel financially squeezed already — to make larger, continuous contributions to their retirement accounts. They would also have to refrain from cashing them out when they changed jobs or faced financial hardship. And those may be the biggest challenges of all.