Safe and secure — that’s what defined benefit pensions are supposed to be.
For many Americans, defined benefit pensions have been a dream come true. After a few decades of labor, they’ve retired in their 50s or early 60s with a comfortable pension income for life.
But that dream come true is too good to last. Across the country, many private and public pension plans are on the brink of failure. They’ve promised trillions of dollars in benefits, without socking away enough money to pay them.
Pensioners could lose some or all of their expected benefits, and taxpayers will be forced to pony up and cover most public pensions’ unfunded promises — maybe even some private ones. It’s a bad scenario for retirees and taxpayers alike.
The coming pension tsunami didn’t arise out of the blue; the defined benefit pension system was inherently flawed from the beginning.
Defined benefit plans were established to insulate workers from risk — the risks of not saving enough, not earning high enough investment returns, and outliving one’s savings.
But planning for retirement is inherently risky business, and there’s no way around that. Even if workers were forced to set aside a seemingly prudent amount for retirement, there’s always the chance that they’ll live “too long” or that their savings won’t earn enough to keep up with rising living costs. That holds true whether it’s a worker or an employer in charge of the planning.
So the question becomes: Who is better equipped to manage retirement savings — workers themselves, or employers and politicians? Workers have a lot more skin in the game. If they don’t set aside enough savings for retirement, it’s their own financial future on the line.
Unions and politicians who manage the majority of defined benefit pensions, however, have conflicted interests. They have little to lose and much to gain from making wildly generous promises, without making the investments to back them up. And lax-to-nonexistent federal pension regulations certainly don’t bolster their dependability.
When multiemployer or union pension plans fail to set aside enough to pay promised benefits, they either seek a taxpayer bailout (as the United Mine Workers of America has done) or become insolvent, turning the mess over to the government-run Pension Benefit Guaranty Corporation (PBGC).
When that happens, the PBGC cuts most workers’ pensions, but pays the union trustees who oversaw the plan’s demise to keep managing the defunct plans.
When state or local governments don’t properly fund pension plans, their taxpayers are on the hook to make up the difference. According to the American Legislative Exchange Council, the current $5.6 trillion in unfunded state and local pension promises amounts to $17,427 for every man, woman and child in America.
That doesn’t stop politicians from continuing to sweeten these already unaffordable retirement pots.
For example, Philadelphia Mayor Jim Kenney helped push through a local law that removed a pension funding requirement so that the city’s pension plan could dole out even larger bonuses to current retirees. From a fiscal perspective, the change is ruinous. But the political calculus says that retirees are reliable voters, and bigger bonuses make them happy.
The delayed nature of defined benefit pensions lets union leaders and politicians reap short-term advantages from actions that ultimately harm workers and taxpayers. If retirement promises had to be paid in real-time, like defined contribution 401(k) benefits, unfunded obligations would not exist.
The only way to prevent unfunded pension obligations is for employers to shift workers out of defined benefit plans and into defined contribution plans.
Separately, however, Congress should protect workers and taxpayers from unfunded pension promises by: allowing pension plans to make reasonable changes to future benefit accruals; ending special treatment for union pensions; encouraging state and local pensions to use reasonable assumptions and enforce greater accountability and integrity; and making the PBGC function more like a private insurance company.
The era of our grandfathers’ pensions is gone, but the costs they’ve pushed onto current and future taxpayers will linger on.
This piece originally appeared in The Washington Times