The Attack on Pensions
Verizon announced that all of its non-union employees were losing their guaranteed pensions in favor of 401(k) individual accounts. The plan also cuts off all retiree health benefits for all workers hired in the future or currently with less than fifteen years at the company.
Two comments-- one, this is what it means to have a union. They can't impose this change but will have to ask permission at the next bargaining session. Just remember, there was only one group of workers at Enron, the Sheet Metals Workers union folks, who didn't lose their pensions to the company's manipulation of the stock price, since they had their own plan with guaranteed benefits.
The broader point is that the problems of Wal-Mart at other low-wage, low-benefit companies are going to cost the taxpayers and society far more than you can calculate:
When Sears froze its pension plan last January, it said it had to do so because it was competing with other large retailers, like Wal-Mart, that did not offer pensions to workers.Since many of the costs will be dumped onto the future when retirees and others find they can't cover their pension and health costs due to various crises. These companies are just dumping many of these costs onto the public, since most of our welfare state has depended on the assumption that most workers were covered by company health and pension systems, so the government would have to pick up the costs of only a small portion of retiree costs.
That's rapidly changing and the political and budgetary costs are going to radically change. Some may celebrate it as a chance to create more universal systems of coverage, but it's just as likely that these costs will squeeze out funding for many other programs effecting the most vulnerable in our society. Just look at the House GOP-- willing to vote for a prescription drug benefit for most retirees, yet slashing food stamps and other benefits for the poorest Americans.
Forget social security-- the real crisis of American's retirement future is happening in corporate America as future benefits are being slashed by the day.
The points about having union representation so that companies can't make unilateral working condition changes is certainly appropriate in these days of declining power for organized labor.
The issue of defined benefits vs defined contribution needs to be discussed as a separate issue. Defined benefit plans were an adequate solution when workers expected life time employment as a single, stable, firm. They provided a modest, but assured retirement income. Since the assumptions of stable employment and corporate viability are no longer valid this is no longer a good option.
A defined contribution plan (especially one that is portable between employers) is a much better solution. The ideal plan contributes a fixed amount from the employer, combined with an amount from the employee. Once the funds are contributed they are no longer under the control of the employer.
This has the benefit that the management of the retirement fund is not subject to employer's gaming the system and is secure even if the employer goes out of business. An ideal plan would also fully vest the employer's contribution after only a fairly short period of time (one year max, in my opinion).
The main problem people have with defined benefit plans is that they seem to put the burden of how to invest on to the (inexperienced) employee. They also seem to push the employee into gambling with their retirement funds in the stock market. Proper management of the funds can be assigned to a respected fund manager such as a bank, brokerage firm or mutual fund. The funds need not be put into the stock market. A measured contribution of funds into government bonds will give a steady return, and the final value can be calculated reasonably closely and thus, planning for the amount one will have to retire on can approximate the assurances of the defined benefit plan.
A good idea of how this can be done is to look at the TIAA-CREF organization which provides just this sort of service for those in higher education and related fields. By being non-profit it also removes some of the complaints about mutual funds that have been levelled. There is no reason a union or industry group could not establish a similar organization for its employees.
December 6, 2005 6:27 AM | Reply | Permalink
The main problem people have with defined benefit plans is that they seem to put the burden of how to invest on to the (inexperienced) employee.
You mean to say "defined contrbution plans" plans, here, right?
If the choice is between having companies renege on their pension commitments (with no cost at all to them, as far as I can tell) or at least having a 401K, then yes, it's a no-brainer. But do keep in mind that pensions are cheaper to fund than 401Ks, because there's no payout to people who die young. There's an insurance element to pensions that don't exist in 401Ks, so contribution per retiree has to be higher to generate the same benefit.
The right solution, of course, is a guaranteed retirement benefit from the government, which would be cheapest of all. It'd have to have a later retirement age than 55 or 62 to be affordable, but it would be the cheapest way to go.
December 6, 2005 8:36 AM | Reply | Permalink
It is important to remember that the burden of risk is more heavily placed upon those with defined contribution plans, and that risk is higher than it would be with a pool paying into defined benefit plans. Also, the risk to reward ratio is much worse for db's when compared to dc's because a set payout is known up-front with the latter, but market-based for the former.
December 6, 2005 9:01 AM | Reply | Permalink
I don't think the Radicals have a definition of "society" which agrees with your underlying premise. To them, people who put 500,000 into their 401(k) over their working life will be fine in retirement, at least until they get really sick. Then they, like those who did not manage that 500k, will die. Those lucky duckys, the top 0.5% of the population, who have 20,000,000 in the bank at age 60 will do fine.
This is an intended feature of the Radicals' world view. What you are seeing today is just a straightforward implementation of that feature.
sPh
December 6, 2005 9:34 AM | Reply | Permalink
Tell that to my AA flight attendant friend. She just saw her pension get cut in half. Your "lower risk" point rests on companies actually paying the pensions they've said they'll pay. After a couple of decades where they were rewarded for underfunding pensions--and actively worked to both underfund their pensions and cover up the fact they were doing so, it's not at all clear that an employee is not better off with his own money.
Better still, and cheaper still is a broadl government social insurance program.
December 6, 2005 9:49 AM | Reply | Permalink
The biggest problem with defined benefit plans is that most companies don't even offer them. The next biggest problem is that workers must stay with companies at least 10 years to collect anything. Defined contribution plans can work for employees if done correctly. First all workers would be covered for their entire career by every employer. Secondly, all employer contributions would be immediately vested. Third, no withdrawls would be allowed except for retirement. A universal defined contribution policy would allow workers to have money invested in their retirement account from every paycheck, regardless of who they're working for or how long. Forty-five years of investing (or saving)8 percent (or more) of your income should add up quite nicely. Health care is a different problem for a different discussion.
December 6, 2005 9:58 AM | Reply | Permalink
I'm all for the broad government plan.
Health care would be for a different conversation if it weren't attached as a liability regarding defined contribution plans for retired people who are more likely to get sick (and in fact will get sick at some time). In order to qualify for medical assistance, their retirement investments would first have to be raided. If, however, they are recieving a defined benefit, it is more likely to be there (with deference to the point regarding the airlines). Also, companies providing pensions are more likely to provide health coverage, too.
Here's a question: How many workers postponed retirement in 2001-2004 because they looked at their portfolios and knew they couldn't make it? As more and more companies move to defined contribution plans, this may make for an interesting new facet in job growth...
December 6, 2005 10:21 AM | Reply | Permalink
This is a tough discussion.
It's unrealistic to expect that Government programs would be better or cheaper. The politicians from both parties have shown an inability to accrue funds and have them available on an ongoing basis. Any department showing a surplus will always have the money reallocated.
The defined pension program also has major issues. Contrary to one posters comment that they are cheaper this is certainly not true. The actuarial tables predictablity over a large group of individuals eliminates almost any chance of a surplus being accumulated. Even unexpected diseases such as AID's or a bird ful pandemic will not have a signficant impact over the life of the pension program. These programs are by far the most desirable to a retiree but the most vulnerable. Many companies can not or will not honor these. More than a few are proactively assuring that as few as possible employees make it to the fully vested stage. Many employers can not meet the financial obligations that are pending on these programs.
This leaves us the least attractive but most realistic option. Employee contribution plans are the ones most likely have any funds available for workers in their 30's or early 40's. Many of my peers have little expectation of their pension plan being viable or that social security will exist. Many will be working well into their late 60's or early 70's. This is not a unreasonable expection given todays work enviroments (many are not blue collar or labor intensive), overall health and the quality of current health care as well as a declining number of younger workers coming into to pay for my retirement.
The reality is that due to the obove factors while we may be retiring later we will live longer and probably have, on average, as many retirment years as previous generations did.
December 6, 2005 10:33 AM | Reply | Permalink
December 6, 2005 10:46 AM | Reply | Permalink
The issues about defined benefits vrs. defined contributions are important. But, the central issue is the looting of pension plans by corporate America. I have friends who were with major companies and now their pensions have been reduced to little.In the 1980's it was the Savings and Loans. In 2001 it was Enron, Worldcom, Tyco, etc. Now, in 2005, it is the looting of pensions. This has a devastating impact on hundreds of thousands. And, it will cost the taxpayers millions.I forget which bank robber it was in the 30's. He was allegedly asked, why did you rob banks. He replied, that is where the money was. Now, the money is in pensions. Many good people are being robbed. And Congress, under corproate dominance, will do little.
December 6, 2005 9:25 PM | Reply | Permalink