As millions of Americans struggle to save enough money for retirement, economists, lawmakers and workers are advocating the revival of a retirement planning relic.
A movement for a return to defined benefit plans, aka pensions, is gathering support amid anxiety over the country’s looming pension crisis. Although these benefits have largely disappeared from the private sector over the past four decades in favor of defined contribution plans like 401(k)s, recent survey data shows that pension benefits are one thing Americans appear to be agreeing to agreement.
In a survey released in February by the National Institute on Retirement Security, or NIRS, more than 80% of respondents said all workers should have a pension to protect their financial independence and self-confidence in retirement. More than three-quarters also agree that employers’ abandonment of retirement benefits has made the “American Dream” more elusive.
It’s not hard to understand why U.S. workers feel this way, considering that more than half of all Americans face a financially insecure retirement, according to a report from the Committee on Health, Education, Labor and Pensions of the Senate.
In a surprising move, technology company IBM — which has about 288,000 employees — announced in November that it would end its 401(k) matching program and return to a pension-like plan. Some are optimistic that a so-called pension renaissance is on the horizon, but can it really make a comeback?
Where have all the pensions gone?
Pensions are an employer’s retirement benefit that provides a monthly income in retirement, a kind of paycheck. They also make up one leg of the traditional “three-legged stool” model of retirement income planning (the other two are Social Security and personal savings).
Dan Doonan, executive director of NIRS, says retirement benefits are “incredibly easy to use.”
“You sign up for a job, do your job and get the income later,” he says.
While workers bear investment risk with defined contribution benefits like 401(k)s, the opposite is true with pensions. Craig Eissler, wealth advisor at Halbert Hargrove, says that in a retirement system, employers must decide how to invest funds that will ultimately provide guaranteed monthly payments to workers after retirement.
These once common benefits began to become expensive for employers as life expectancy in the United States increased throughout the 1980s and 1990s. Falling interest rates and declining investment returns have also created significant underfunding and required employers to contribute more, Eissler says.
While pensions are still widespread in the public sector, most private companies now consider pension benefits risky and expensive. Over the past four decades, most have moved to defined contribution plans.
According to the HELP report, in 1975 nearly 30% of the workforce had pension benefits. Today it is only 13.5%.
Disparities in retirement security are increasing
Looking at recent 401(k) performance, you might think that retirement savers are doing pretty well. In the final months of 2023, the average 401(k) balance increased to $118,600 thanks to favorable stock market conditions. The number of 401(k) savers whose balances reached the $1 million threshold also increased.
The HELP Committee’s report, however, suggests that the U.S. retirement system is evenly divided between haves and have-nots. Nearly half of Americans age 55 and older have $0 saved for retirement, and a similar share of Americans overall are at risk of financial insecurity as they exit the workforce.
Among those aged 65 and older, 52% live on less than $30,000 a year. One in four lives below the U.S. poverty line, meaning they live on less than $15,000 a year.
Doonan says that when comparing 401(k)s to pensions, a closer look reveals that they don’t serve the same group of people. Defined contribution plans tend to favor higher earners because they generally have greater access to these benefits and are able to contribute a larger share of their income.
There’s also a big difference between the average and the median when it comes to retirement savings, Doonan says. The institute examined the retirement resources of Generation X, which is rapidly approaching retirement age as the first generation to experience a predominantly post-retirement workforce. (Gen X generally includes anyone born between 1965 and 1980.) While the average Gen
Additionally, economic factors such as recent inflation, stagnant middle-class wage growth over the past four decades, and record-breaking consumer debt have created barriers to saving for many workers, exposing another 401(k) trap. In 2022, about 66% of private industry workers had access to defined contribution plans, but only 48% of them participated, according to the U.S. Bureau of Labor Statistics.
New provisions that took effect this year as part of the SECURE 2.0 Act aim to address some of the current challenges of retirement savings. Some part-time workers now have access to pension plans thanks to new requirements, which will be expanded again next year. In 2025, workers with access to workplace retirement benefits will be automatically enrolled in most new 401(k) and 403(b) plans.
But even if they have access to them, lower-paid workers tend not to contribute to defined contribution plans because they don’t earn enough to put away those savings.
Pensions, on the other hand, are “a real benefit to the middle class,” Doonan says.
Defined benefit plans have been shown to reduce retiree poverty regardless of gender, race and education level, according to an analysis published by NIRS. Among retirees with retirement income – from their own plans or that of a spouse or resident family member – 91% lived above 200% of the federal poverty level (defined by the most recent U.S. Census as $23,120 for single retirees and $32,180 for couples). .
By comparison, only 60% of retirees without pension income lived above that threshold.
A separate analysis by the Congressional Budget Office found that the recent shift away from defined benefit plans may be responsible for about a fifth of the rise in the nation’s wealth inequality from 1989 to 2019.
Is a “pension renaissance” coming?
Americans shouldn’t expect old-fashioned benefits to swoop in to safety anytime soon. This is because employers are still reluctant to take on the obligations arising from traditional pensions.
IBM, a “trendsetter” when it comes to human resources policy, created some buzz when it ended its 401(k) matching program and established a type of defined benefit plan called a retirement benefit account. IBM says the account is part of the company’s personal pension plan, which helps you automatically save for retirement with no required contributions from employees.
The retirement benefit account replaces IBM’s previous contributions to its 401(k) plan, but employees can continue to contribute to their 401(k)s if they choose, a company spokesperson adds.
It’s not exactly like a traditional pension, and Doonan explains that the decision was largely situational. In fact, it may be more of a financial ploy than a benefit to workers’ retirement security, an independent analysis has found.
IBM held a $3.5 billion surplus in its old defined benefit plan, which closed nearly 20 years ago. Because the plan is overfunded, IBM can now use that surplus to pay employee retirement benefits instead of spending operating dollars on its 401(k) plan.
The researchers determined that only a handful of other large companies may follow IBM’s lead – and only if it makes sense for them as well.
Otherwise, Doonan said, a widespread reinstatement of traditional pension plans probably wouldn’t be realistic, given how expensive it would be for private employers today. From a public policy perspective, he says, lawmakers need to make it more attractive for employers to sponsor a defined-contribution plan that covers seniors for the entirety of their retirement. New plans that more equitably balance risk between workers and employers could also help incentivize companies to offer pensions.
These reforms and innovative plan designs could offer a new path for pensions.
“I think there’s been a conventional wisdom that’s really hardened around the idea that there’s only one way to make a pension,” Doonan says, but that’s no longer true.
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