The vanishing pension and its discontents

Dallas Salisbury, Employee Benefit Research Institute

Dallas Salisbury, Employee Benefit Research Institute

If only we could revive the good old pension. You retire after 30 or 40 years at a company, get the gold watch, and the monthly checks start flowing.

Many Americans still get those checks, but Corporate America has been running away from defined-benefit (DB) pensions for decades, and many experts see that as a key cause of our retirement security crisis. Pensions provide a guaranteed lifetime income stream, while owners of 401(k)s and individual retirement accounts take on two impossible-to-control risks: stock market volatility and uncertainty about their own longevity.

But were traditional pensions ever really the golden goose of American retirement? And do workers really value them as highly as policy gurus think they should? Those provocative questions were debated last week at a gathering of top retirement policy experts from around the world sponsored by the Pension Research Council at the Wharton School of the University of Pennsylvania.

The event, called “Reimagining Pensions: The Next 40 Years,” marked the 40th anniversary of the passage of the Employee Retirement Income Security Act (ERISA), the law that governs U.S. private-sector retirement plans. Speakers examined the health of the U.S. retirement system and considered what the system will – or should – look like in the years ahead.

Right now, we’re on rocky ground. Half of all U.S. households won’t be able to maintain their standard of living in retirement, according to the Center for Retirement Research at Boston College (CRR). Rising longevity, rising healthcare costs and declining income replacement rates from Social Security are all factors.

CRR researchers also pointed to the decline of defined-benefit pensions as a destabilizer of retirement security, but that contention drew some fire at Wharton. While DB pensions do a good job for workers who stay at a job for many years, they were never a good solution for those who shift jobs frequently, since pensions aren’t portable, argued Dallas Salisbury, president of the Employee Benefit Research Institute.

Under ERISA, employers can require that employees have five years of service to become 100 percent vested, or longer periods with gradual vesting. Yet an EBRI analysis finds that median tenure for male workers age 55 to 64 topped out at 15.3 years in 1983, and slid to 10.7 years in 2012. For female workers in that age group, the figure has remained more stable, around 10 years.

“Contrary to some folklore, most U.S. workers have always changed jobs a lot,” Salisbury said. “Many are better off due to defined-benefit plans, but for most retirees, the move away from defined-benefit plans has had limited or no negative impact on their financial well-being, as they never had the benefit.”

Learn more about the debate in my column today at Reuters Money.