Retirement Insecurity: A Problem that Needs a Solution (so here’s one!)

Jared Bernstein

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Here’s the basic lay of this troubled landscape: First, based on long-term wage erosion, low savings, and the shift from defined benefit (DB) pensions to defined contribution pension plans (DC)—see figure—there are a lot fewer people who will reliably be able to replace enough of their lost earnings when they retire. DB plans guarantee a pension benefit; DC plans are individual retirement accounts that fluctuate with the markets; thus, the figure shows the locus of risk in retirement security shifting from employers to workers.



Second, some pension plans held by public workers—and thus a liability for their public sponsors, like municipal governments—are in trouble, often due to a collision of irresponsible funding practices and the Great Recession. Though cases facing potential defaults dominate the headlines—including today’s—they are the exception. Yes, there exists a serious funding shortfall in many public plans, but no, that doesn’t imply the need for massive restructuring, benefits cuts, and defaults. In fact, on average, states, cities, and towns devote less than 5% of their operating budgets to funding their pensions.

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A far bigger problem is the fact that too few of today’s workers have any sort of pension at all. Half of private sector workers do not participate in any retirement savings plans, and as you’d expect, participation is a function of your wage level. For low-wage workers—those in the bottom 25% of the wage scale—20% participate in plans; for those in the top 25%, it’s 75%.

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So scholars and advocates are thinking about ways to cover a lot more people, and a bit of a consensus is forming around a hybrid between DBs and DCs that involves pooling over large numbers of workers—as with health care reform, pooling risk is the best way to dilute it. Here’s the way something like this might work:

–state or federal governments would set up public pension plans that guaranteed a modest return—more of a supplement to Social Security than a DB replacement (as the latter could place new, large liabilities on the public sector) in which all workers could participate. In other words, the plan would be organized and managed by the state or federal sector, as they have by far the greatest capacity to pool and manage large plans; but any employee, not just public sector workers, could participate.

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http://jaredbernsteinblog.com/retirement-insecurity-a-problem-that-needs-a-solution-so-heres-one/