Retirement

Dinosaurs Are Extinct. Pensions Are Alive And Well.

Kids love dinosaurs. These larger-than-life, amazing creatures that existed some 66 million years ago continue to fascinate both children and adults. Just think about how dinosaurs are still prevalent in modern popular culture – the blockbuster Jurassic Park franchise, Toy Story’s sweet Rex, and beloved Barney. Not to mention the myriad dinosaur exhibits that remain highly popular attractions at science and natural history museums around the world.

Sometimes, we hear defined benefit (DB) pensions compared to dinosaurs. Like dinosaurs, pension plans are fascinating, large, and strong. They are a reliable source of retirement income and remain extremely popular among workers today. But unlike dinosaurs, pensions are not extinct. In fact, pension plans are alive and well today, paying benefits to 25 million people, holding $11.8 trillion in plan assets, and more than $600 billion in benefits paid annually to support seniors. About 90 percent of the state and local workforce has a pension plan. While pensions are less common among private sector workers than they were 50 years ago, we’re starting to see a reevaluation of these corporate retirement plans that workers like and value.

Congress Takes A Fresh Look At Pensions

The impact of fewer pension plans in the private sector on the retirement security of working Americans was the subject of a hearing before the U.S. Senate Health, Education, Labor, and Pensions (HELP) Committee in February. I was honored to testify as an expert witness about the role of pension plans in empowering workers to retire with dignity, helping employers maintain a stable and resilient workforce, and strengthening the economy, especially in market downturns.

The HELP Committee remains committed to understanding the current role of pensions in the retirement security landscape and followed the hearing with a request for information (RFI) on policy actions Congress could take to increase the availability of pensions in the private sector. It’s encouraging that the committee is taking this step because it demonstrates action to help working Americans address the retirement savings crisis and get back on track in terms of preparing and saving for retirement. Congress has passed two significant pieces of retirement policy legislation in recent years, the Setting Every Community Up for Retirement Enhancement (SECURE) Act and SECURE 2.0, but those were primarily focused on policies affecting 401(k)s and other defined contribution (DC) plans. Pensions, and policies that would bolster these plans in the private sector, now are getting the attention they deserve from Congress.

The National Institute on Retirement Security (NIRS) got to work following the hearing and prepared a report in response to the HELP Committee’s RFI. That report, Policy Ideas for Boosting Defined Benefit Pensions In The Private Sector, recommends six potential policy actions Congress could take to boost pension plans in the private sector. Those recommendations include:

— Lowering the per-person rate of Pension Benefit Guaranty Corporation (PBGC) premiums for single-employer pension plans.

— Reducing the variable rate PBGC premium.

— Formally acknowledging in statute risk-sharing plans.

— Permitting greater flexibility in the use of funding surpluses in DB plans.

— Allowing pre-tax employee contributions in private-sector pensions similar to state and local government pension plans.

— Formally acknowledging in statute that retirement benefits should be fungible for each individual and allow transfers from defined contribution plans to pension plans (and conversely) in the vein of Revenue Ruling 2012-4.

While each of these policy actions separately might not represent a major change, taken together they offer a pathway to increasing the availability of pension plans, especially by easing employer concerns regarding the funding of pension plans.

Corporate America Also Takes A New Look At Pensions Amid Strong Markets and Workforce Challenges

Corporate pension plans are thriving at the moment. The most recent Milliman 100 pension funding index reported a funded ratio of 103.4 percent as of April 30. While rising interest rates are posing challenges for many consumers, they are helping to strengthen the funding of many pension plans. The strong position of corporate pension plans has restarted conversations about the role of pension plans in total employee compensation.

Also key to these conversations are the workforce recruitment and retention benefits that pensions offer to employers, especially in today’s drum-tight labor market. A whopping 90 percent of workers with a pension say that a pension benefit makes them more likely to stay in their job even if another job opportunity were to come along. And more than half (57 percent) of workers say they are more likely to choose the job that offers a pension over a 401(k) plan.

IBM
IBM
surprised many last year with its decision to end its 401(k) contributions and reopen its cash balance pension plan. While IBM currently stands alone in its decision to return to offering a pension, other private companies could follow suit. A signal from Washington lawmakers in favor of boosting pensions could encourage other companies to act. This would not only strengthen retirement security for working people, but could be financially beneficial for those companies.

Pensions are the most economically efficient way of delivering retirement income for workers. This efficiency helps workers, who benefit from the pooling of longevity and investment risk and the professional management of assets. And this efficiency also helps companies provide a given level of retirement benefits at half the cost, which is good for the corporate bottom line. Congress has an important role to play in creating a favorable policy environment that’s supportive of pension plans. The recent interest from Congress in establishing such an environment is encouraging.

So let’s leave it to dinosaur lovers to imagine the wonders of long-extinct creatures, and let’s keep focused on supporting something that’s increasingly thriving today: the defined benefit pension plan.

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