A Defense of DB Pension Plans
J. Bradford DeLong, an economist and blogger, writes an eloquent defense of defined-benefit pension plans on the website TomPaine.com. He builds his thesis around the corporate trend of abandoning DB plans in favor of 401k-style defined-contribution plans.
DC plans, DeLong emphasizes, place their account-holders at the mercy of the stock market, which many economic conservatives argue is a better model than the guaranteed benefits of DB pensions. He disagrees and argues that governments should resist the temptation to abandon defined benefits in favor of defined contributions.
DC plans, DeLong emphasizes, place their account-holders at the mercy of the stock market, which many economic conservatives argue is a better model than the guaranteed benefits of DB pensions. He disagrees and argues that governments should resist the temptation to abandon defined benefits in favor of defined contributions.
This fall-off in private defined-benefit pensions is a bad thing, because the configuration of asset prices suggests that young and middle-aged workers value defined-benefit pensions extremely highly. Historically, the gap between expected returns on low-risk assets like government or investment-grade bonds and high-risk assets like stocks and real estate has been very high.
In my opinion, at least, this is partly because the memory of years like 1930 and 2000, when stocks performed very badly, occupies too large a place in investors’ minds. Workers and other asset holders place a very high value on safety, security, and predictability, so a defined-benefit pension plan is extremely valuable.
But in today’s world, only national governments are large enough to be able to ensure that the pension assets will actually be there when workers retire. I am enough of a social democrat to believe that if there is an economic service or benefit that citizens value extremely highly and that only the government can provide, then the government should provide it.
We economists know that there are many drawbacks to expanding the role of government. But the collection of payroll taxes and the writing of pension checks is the kind of routine, semi-automatic task that government can do well. It is even more important and valuable that government does it in our post-industrial, network-age society than it was in the past.
posted by H.K. Anders at 1:45 PM
1 Comments:
They key question -- as it always is -- is at what cost? Of course people wouild like absolute security if they do not know what it costs.
Like almost everyone in the debate, DeLong entirely overlooks half of the equation that we should be using (benefit >= cost).
Few people save 12 percent of the paycheck in a 401(k) plan (and few companies pay that much for their DB plan), yet both 401(k) plans and DB plans at that level of deferrals will pay a higher benefit than Social Security does. (Remember: those people who are afraid of stocks in their 401(k) can use GICs and still earn a real return that is higher than Social Security's).
Additionally, the proponents of DB plans over DC plans overlook the workers who value the freedom to change jobs late in their careers without losing their retirement benefit. They also overlook those workers who fail to build enough longevity at any one job to create a significant DB benefit.
One elegent solution that is not being discussed is the use of cash balance plans. Today, those plans are not being created by employers because of opposition from "progressives" that want to lock the traditional pension system in time and place.
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