Pension Policy: The Search for Better Solutions

Pension Policy: The Search for Better Solutions

Pension Policy: The Search for Better Solutions

Pension Policy: The Search for Better Solutions

Synopsis

Turner identifies the current problems facing pension policy for U.S. employer-provided pension plans and recommends solutions to those problems based on his examination of pension systems in other industrialized nations.

Excerpt

The U.S. pension system needs fixing. While some of its problems are longstanding, the system overall is in decline. Projections of the future are not certainties, and some analysts differ, but it appears likely that the financial security of current workers when they retire will be less than that of current retirees. For workers relying on 401(k) plans (which were named after the Internal Revenue Code section that enabled them), dramatic declines in the financial markets around the world in 2008 turned retirement security formerly provided to long-tenure workers by defined benefit plans into a system of retirement roulette. Workers in 401(k) plans are gambling that they will not be retiring in a period of dramatic stock market declines, such as experienced in 2008.

By international standards, the U.S. pension system performs poorly. When measured in a comparable fashion, the U.S. poverty rate for people age 65 and older is more than twice as high as in other high-income countries (Pension Rights Center 2007). the move toward 401(k) plans has reduced the extent to which the pension system provides annuities and survivors benefits, reducing retirement income security. People who work for employers that offer 401(k) plans often do not participate, and when they do they tend to make poor financial decisions. Employers are abandoning defined benefit plans for workers while maintaining generous pensions for executives. People in defined benefit plans who are laid off suffer portability losses, while their employers’ plans receive corresponding actuarial bonuses. Long-lived retirees in defined benefit plans have the real value of their benefits decimated by inflation, while long-lived retirees in defined contribution plans risk running out of money because of not having annuitized their account balances.

The pension system is supposed to provide secure and adequate retirement income. in both respects, the U.S. system needs better solutions. With the decline in defined benefit plans and the increasing reliance on 401(k) plans, future retirees will have less secure and less adequate retirement income than current retirees. While that outcome would not occur if all workers covered by 401(k) plans contributed to their plans consistently and made wise investment decisions, research . . .

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