A Penchant for Pensions?

 I’m not sure how old I was when I first saw “Night of the Living Dead”—but I have long been intrigued by stories of a zombie apocalypse—where mindless beings inexplicably rise from the dead, with no memory of their past, just a relentless (and apparently insatiable) hunger for…well, “us.”

That is perhaps an unfortunate comparison to last week’s hearing by the Senate Health, Education, Labor and Pensions (HELP) Committee, one ostensibly held to focus on how we were going to stave off the retirement “crisis” by…bringing “back”[i] defined benefit plans.[ii]

There were two fundamental premises underlying the hearing; first that there is, in fact, a retirement crisis, and second, that the restoration of defined benefit plan designs would remedy that situation. 

There remains in many circles (including last week’s hearing) a pervasive sense that the defined contribution system is inferior to the defined benefit approach—a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And when it comes to defined benefit plans, it was significantly less than half.

And while you can (eventually) wrest an acknowledgement from those familiar with the data, almost no one EVER talks about how few of even those covered by those DB plans put in the time required to vest in their full pension (particularly prior to the Tax Reform Act of 1986, which accelerated vesting schedules). Those who demonize the 401(k) are never asked to speak to the “coverage gap” that was actually wider when defined benefit structures were “in vogue,” nor called for an accounting of the shortfall between the actual benefits delivered versus the “promise.” And yet, those 401(k) critics in last week’s hearing—with a straight face—held forth on how much better things would be…if only defined benefit plans would come back.

Don’t get me wrong—defined benefit plans continue to serve a valued societal purpose (not the least of which the income they provide my 93-year-old mother, though given the state’s finances, she remains concerned how long they will last), though they tend to work “better” in the public sector and among unionized workforces, where one’s profession and job tenure tend to be less volatile. That said, it’s not like there was some kind of cataclysmic event that wiped them out overnight in the private sector. Rather, their demise was one of a hundred painful “cuts”—all well-intentioned, of course. 

There were (and are) premiums to provide insurance backing for plans that “fail,” disclosures to try and avoid (unexpected) failures, demands for a full accounting of the potential financial obligations those plans represented for the organizations that sponsor them, and finally a demand that those financials be moved from footnotes to the corporate balance sheet itself. At any number of points along that continuum, one could well understand and appreciate why employers would choose to step away from that burden—and they did. 

Moreover, with few exceptions they were able to do so without opposition from employees—who typically didn’t (and largely still don’t) appreciate the cost or benefit of a promise that won’t come to fruition until years, if not decades, beyond the date they expect to be employed by the firm making that promise. And that ignores a criticism highlighted by several in the hearing—that these programs aren’t always well-managed or funded to provide those promised benefits.         

Yes, a fully funded, fully vested benefit that you’ve paid nothing for is certainly a good thing. Little wonder that a recent survey (by one of those firms represented at the hearing) suggested a massive public clamoring for the alleged panacea of these programs. And considering the plethora of headlines proclaiming the dire straits of today’s retirees, who can be faulted for clinging to a benevolent notion of a simpler time when someone else worried about such things?

All that said, there was little in the way of actual data at the hearing to suggest that a return of DB (certainly at the expense of the 401(k)) would actually resolve the issues. Mostly the witnesses focused on the alleged shortcomings of the current system (albeit with some sharp differences in conclusions, and a brief debate about the different results one gets from actual data versus surveys reliant on what people think in terms of establishing whether or not there is an actual crisis), alongside some optimism that SECURE and SECURE 2.0 had laid the groundwork for potential improvement in coverage, sufficiency and decumulation options. If there was a consensus, it might have been that we need to address the projected shortfalls in Social Security benefits—and, truly, if that isn’t, then we really will be looking at a crisis.

The thing that makes cinematic zombies so terrifying is that there are so many of them—and that they keep getting up and pursuing you no matter how much damage you inflict.[iii] That, and they manage to “convert” more with a simple bite. Let’s face it—a truly serious look at the retirement “crisis” would acknowledge that under traditional vesting definitions and job turnover rates in the private sector, defined benefit designs are, at best, a dubious solution. 

A penchant has been described as an irresistible attraction, as someone having a “penchant” for taking risks. 

A more practical one would be to look at a system that is already in place and working for those with access—and talk about ways to make THAT reality a reality for all.

- Nevin E. Adams, JD

 

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[i] In fairness, there are still defined benefit plans about, even in the private sector—though they are considerably fewer than they were a generation ago, and many are frozen or in termination status. 

[ii] The hearing was titled and you can still listen to a recording of it here, "Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers."

[iii] Well, except for the occasional well-placed headshot.