While many current retirees are reasonably comfortable because they have pensions, the future does not look bright for those yet to retire.
Traditional defined-benefit pensions are rapidly disappearing in the private sector—less than 15 percent of workers have them. Most public sector workers still have them—more than 20 million are either now receiving or looking forward to a pension. However, public sector pensions are coming under attack from the American Legislative Exchange Council (ALEC) and other right-wing groups.
Over the last four decades employers have been anxious to convert the traditional defined-benefit pensions into defined-contribution 401(k) plans.
The difference is that with a defined benefit, the worker is secure while the employer does not know exactly how much it will have to pay in. Workers are guaranteed a lifetime benefit based on their salary and years of service; the employer’s bill depends on the worker’s longevity and on stock market performance.
With a defined-contribution plan, the employer knows just how much it will pay each year, and the worker shoulders all the uncertainty. This means that workers face the risk that the market will plunge just after they retire—and they may quite possibly outlive their savings.
By getting rid of defined-benefit plans, employers are transferring risk to workers. In addition, they often contribute less to a defined-contribution plan than to the defined-benefit plans they replaced, in effect cutting workers’ pay.
PUBLIC PENSIONS UNDERFUNDED?
There has been a huge effort to portray public employee pension plans as both overly generous and hugely underfunded. Neither is true.
In nearly all cases the public plans provide relatively modest benefits. For example, the average benefit for a retired city worker in Detroit was just over $18,000. When the city declared bankruptcy these workers were forced to take a 4.5 percent cut and give up cost-of-living increases. After two decades of missed increases, this concession may cost retirees one-third of their pensions.
In Chicago, where city workers’ pensions are seriously underfunded, the average benefit is a bit over $30,000 a year. Most news accounts fail to mention that these workers are not covered by Social Security, which means that for most this will be pretty much all their retirement income.
For the most part, public sector pensions are reasonably well-funded. Right-wingers have tried to exaggerate the size of the shortfall with accounting gimmicks that make it appear much larger, producing figures as high as $4 trillion for all local and state pension plans.
However, if we assume that the pension funds earn a return consistent with projections of future economic growth, the additional contributions needed from local, state, and federal governments to maintain full solvency would be around 0.25 percent of the U.S. gross domestic product.
This is hardly a trivial sum, but it would not bankrupt the country. By comparison, at the peak, the wars in Afghanistan and Iraq cost 1.6 percent of GDP. Shoring up pensions would require additional tax revenue from state and local governments, assuming that workers do not agree to make larger contributions from their pay, as many have.
These pensions are workers’ deferred pay. They already worked for them. No one suggests retroactively taking back money governments have paid to contractors in earlier years. It doesn’t make any more sense to retroactively cut workers’ pay, which is effectively what pension cuts do.
PRIVATE SECTOR WOES
Most private sector pensions are from single-employer plans, which are generally well-funded. Employers go after them out of greed, not out of necessity.
If they face a shortfall, the federal Pension Benefit Guaranty Corporation (PBGC) provides a backstop that would give most retirees the vast majority of the money they’re owed.
This is not the case for the roughly 10 million workers and retirees in multi-employer plans—often in industries such as construction, mining, grocery, hotels, and health care where there are many small companies, each too small for an individual plan.
Some of the multi-employer plans, many of which are union-managed, face serious shortfalls. The PBGC guarantee for these plans is far less generous, with a maximum payment of $15,015 a year for a worker with 35 years of service and just $8,580 for a worker with 20 years. (The maximum for single-employer plans is $64,432.)
Furthermore, the PBGC’s multi-employer fund (which gets no government money, just small employer contributions) itself faces serious shortfalls, so it may not be able to support even this guarantee.
The biggest fund now in danger is the Teamsters’ Central States Pension Fund, which includes 63,000 active Teamsters and more than 200,000 retirees and spouses currently collecting benefits. The plan is on course to be out of money by 2025.
Under ERISA, it was illegal for a fund to cut the benefits of someone already retired. But in 2014 Congress passed the Multiemployer Pension Reform Act (MPRA), which gave troubled funds that right.
In 2015 the Central States Fund proposed to cut benefits for current retirees as much as 60 percent. Largely in response to well-organized pressure from retirees, the Treasury Department rejected the plan, but it is clear that cuts will have to be made at some point unless Congress and the companies in the plan can be pressured to put up more money.
Teamster retirees in an upstate New York plan have already seen their pensions cut by 30 percent.
A WORLD OF HURT
In addition to protecting the pensions that workers have already earned, we also need a system to provide for the retirement of current workers. According to the Federal Reserve Board, the total wealth of the median household headed by someone between the ages of 55 and 64 is $187,000. This includes home equity. That’s down from $321,000 in 2004.
For those between the ages of 45 and 54 median wealth was just $124,000.
By comparison, the price of the median home is just over $250,000. This means that the typical near retiree can take all their money, including everything from their retirement accounts, and still have a quarter of their house left to pay off. The younger age group would not be able to pay off even half of their mortgage. This leaves nothing but Social Security to support them in retirement.
The best solution is the return of traditional defined-benefit pensions. The best alternative to that would be a low-cost 401(k)-type system run through public retirement plans. Under these systems, workers at private employers would be able to invest their money with the state retirement system. This would minimize the costs of the system and would allow workers to keep the same plan even as they changed jobs, as long as they remained in the state.
California, Illinois, and Oregon already have passed laws that will put such a system in place over the next few years. Many other states are likely to follow, especially if the systems prove popular. However, the right has been doing everything it can to try to thwart these plans, because the financial industry doesn’t want the competition. They have opposed the plans at the state level and tried to use federal regulations to obstruct their operation.
Privately managed 401(k)s—where most workers have their retirement money, if they have any at all—siphon billions of dollars in fees from workers’ savings into Wall Street’s pockets every year. State-managed systems would mean more money for workers and less money for Wall Street.
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C.