Experts Offer Differing Opinions on the Future of Pensions
Josh Gotbaum, Director (CEO) of the Pension Benefit Guaranty Corporation (PBGC), and Dallas Salisbury, President & CEO of the Employee Benefit Research Institute, provided their perspectives on the future of pensions at the Wall Street Journal CFO Network Annual Meeting in June. They were asked to address whether there is a pension crisis in the United States and how organizations can handle increasing pension obligations.
Gabriella Stern, Deputy Managing Editor of the WSJ Digital Network, discussed these issues with both authorities in their presentation, “The Great American Pension Crisis: Funding Past Promises and Future Retirement.” The dialogue offered a dichotomy of viewpoints on the best way government, businesses, and individuals should move forward.
Retirement Outlook—To Worry or Not to Worry
What keeps Josh Gotbaum up at night is the fact that although people are living longer and their opportunities are increasing later in life, the institutions that help people through retirement are not improving.
According to Gotbaum, only about half of people who work have any kind of an employer provided plan. Of those who participate, the burden is on workers to figure out how much to save and what to invest, which isn’t always in the best interest of getting to retirement.
Gotbaum doesn’t place blame on any one organization, but believes that every entity has a role to play in getting people to save more. He identifies key players in the pension arena, and their associated responsibilities, as:
1. Individuals—Make it known that you want retirement help from employers.
2. Businesses—Employers are infinitely better at negotiating the terms of plans, and as a result, are more likely to promote retirement savings than a person going it alone. This applies to either a defined benefit plan or a 401(k) plan. Companies don’t necessarily have to put up more money, but they can encourage people to divert more of their own earnings into savings.
3. Government—Instead of adding regulatory requirements on those who offer traditional pension plans, government needs to rethink what can be done to make it easier for businesses to afford and offer employees a greater variety of pension options.
Dallas Salisbury, however, is more optimistic that employers have stepped up to the challenge.
According to Salisbury, when the federal government led the move to a defined contribution system in 1984, they did it for one primary reason—the median job tenure of the American labor force. In a simultaneous and reinforcing move, Bank of America adopted an individualized account system.
Employment tenure statistics have essentially remained unchanged from 1952 to 2011, says Salisbury. Over time, an average employee has stayed at a firm for four years. For workers aged 55 to 64, the average employment tenure has remained at less than 10 years during this time period. These job numbers emphasize the relatively rapid job turnover for most of the economy, according to Salisbury. The old defined benefit system that subsidized employees who stayed with one company for 25-plus years actually represents a small percentage of the American workforce.
In 1974, the year ERISA passed, 13 percent of people over the age 65 had pension income. By 2001, 23 percent of private sector workers had some pension income. Employers are using automatic enrollment at growing rates, according to Salisbury. The Employee Benefit Research Institute has looked at the population of workers today that have defined contribution programs, and compared them based on turnover and the “what if” scenario of being in a cash balance defined benefit plan instead. A majority (86%) do better through the defined contribution system than they would with a cash balance plan.
If there is a crisis of retirement today, Salisbury supports economist Alan Krueger’s argument that the crisis relates to health care more than retirement income. All of the major insurance carriers that have built a long-term care policy base over the last 20 years are exiting the marketplace, he observes, which will impact Medicare and Medicaid.
Defined Benefit System vs. Defined Contributions
Gotbaum argued that companies should be allowed to continue to offer defined benefit pension plans to the 20 percent in the private sector if it makes sense to them. He makes the case, however, that it is difficult for defined benefit plans to cut costs. Gotbaum cites examples of states or cities that need to trim costs in their traditional pension plans. Municipalities can turn to employees and ask them to contribute to the cost.
It should be possible for the 20 percent of people in the private sector who are in traditional defined benefit pension plans to be able to stay there, Gotbaum contends. From his perspective, companies can legally, and without increasing costs, improve their employees’ retirement security by changing investment options. One example is to offer employees annuities as an option for better retirement security, while still being cost competitive.
Salisbury’s advocacy, alternatively, is that it is in employers’ best interests to take an active role in pension plans so that tomorrow’s retirees have money to maintain a comfortable lifestyle and sustain the country’s consumer-oriented economy.
Fifty percent of people reportedly are forced into retirement because of health, disability issues, or a change in their job situation. Twenty-six percent retire early because their employment disappeared. These individuals need accumulated savings to buy consumer products and help drive the economy. As demographics lead the U.S. to a point where about 21 to 22 percent of the population will be over the age of 65—compared to 13 percent today—these older American will need financial assets to fund their future.
If pension income falls short, Salisbury argues, the U.S. economy risks negative implications for long-term economic growth. If you want everyone to have a plan and you have a high mobility labor force, then you need to make sure you have something that is for everyone, he supports.
Gotbaum summed it up by saying it slightly differently. “Go to your HR departments and don’t just say I need a retirement package that fits. Say, I need choices, and what can I get?” The HR department can respond with a variety of options, resulting in happier employees who will be able to continue fueling America’s consumer-driven economy well into the future.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.