On Wednesday, the Senate Health, Education, Labor, and Pensions (HELP) Committee held a hearing titled: “Taking a Serious Look at the Retirement Crisis in America: What can we do to expand defined benefit pension plans for workers?”
That session included a spirited discussion of the pros and cons, the positives, and negatives of defined benefit pension plans versus individual account retirement savings plans.
Pro
When the discussion focused on individual account retirement savings plans, there was extensive, favorable discussion of recent changes approved on a bipartisan basis—SECURE and SECURE 2.0.
When the discussion focused on defined benefit pension plans, there were many favorable comments about the value of a well-funded plan—citing Wisconsin and South Dakota public employee plans and IBM. Some confirmed that DB plans were more efficient at delivering retirement income to long service workers at normal retirement age.
Con
The oft-repeated shortcomings of the 401(k) plan were highlighted—insufficient coverage, workers who fail to enroll or save enough where eligible, financial literacy issues, investment selection challenges, leakage, the lack of guaranteed retirement income, etc.
There was also criticism of defined benefit pension plans which had unfunded or underfunded promises—starting with ERISA which was itself prompted by Studebaker’s defined benefit pension failure[i], the 2021 Cares Act where America added to our deficit spending and national debt in order to provide a $90 Billion taxpayer bailout of multiemployer pension plans even though Congress failed to apply (and still doesn’t apply) the same funding requirements that have applied to single employer pension plans since the Pension Protection Act of 2006. There was even a defined benefit pension plan history lesson comparing the pension bailout for Delphi’s union retirees against the decision not to bail out Delphi’s salaried retirees[ii].
Some interesting observations
Some suggested greater adoption of DB plans would be a mismatch with employment trends—highlighting turnover prior to age 35. In fact, median tenure for American workers has been less than 5 years for the past seven decades.[iii]
We learned that the OECD thinks 23% of Americans age 65+ are living in (relative) poverty.[iv] America’s official government statistics puts the number at 10.2%. Some would suggest only 2.5% of age 65+ Americans live in poverty.[v] Whatever number is correct, it is clear that we have made considerable progress among age 65+ Americans—60+ years ago, over 30% of age 65+ Americans had incomes below the official poverty line. Keep in mind that a smaller percentage of age 65+ Americans live in poverty when compared to Americans under age 65:
There was also some discussion about the 401Kids proposal to “invest” more tax dollars by opening up an account for each child at birth—with deposits of taxpayer dollars for children in low- and middle-income households.
Who cares?
While interesting, today’s DB vs. DC discussion is probably moot—having little or no practical relevance unless Congress gets to work and resolves the funding challenges for Social Security, Medicare, and Medicaid.
Witness testimony and statements by members of the Senate reconfirmed that the Medicare Hospital insurance trust fund would be exhausted in about 5 years and that the Social Security trust fund would be exhausted in less than 10 years—potentially resulting in a 23% across-the-board benefit cut.
Medicaid is funded by the federal government and states, and while states must balance their budgets, according to the Congressional Budget Office’s most recent predictions, the federal government expects average annual deficits of $2+ Trillion for the next 10 years—raising our national debt from $34+ trillion to $54+ trillion[vi]. Without change, the CBO predicts the national debt will be 172% of GDP by 2054, or $146 trillion dollars (2054 GDP estimate is $85.2 trillion)!
Senator Mike Braun asked two of the witnesses whether it ever made sense to borrow in order to spend? Both Professor Teresa Ghilarducci of the New School, and Rachel Greszler of the Heritage Foundation responded “No.” Greszler pointed out that every child born in America already has a legacy of $100,000+ in federal debt. Both Professor Ghilarducci and Ms. Greszler confirmed that just as interest compounds, so does debt.
Social Security, Medicare and Medicaid are all under the jurisdiction of the Senate Finance Committee.
[i] J. Wooten, ‘The Most Glorious Story of Failure in the Business:’ the Studebaker-Packard Corporation and the Origins of ERISA, University of Buffalo Law School, 11/13/01, Accessed 2/28/24 at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=290812
[ii] House Oversight Committee, Delphi Pension Fallout: Federal Government Picked Winners & Losers, So Who Won and Who Lost? 11/14/11. “While the pensions of unionized Delphi workers were largely protected as Delphi went through bankruptcy thanks to guarantees coming from the federal government/GM, non-union salaried Delphi employees saw their pensions greatly reduced. … an agreement was reached giving unionized Delphi employees a guarantee from GM that it would make pension plans whole in the event of a Delphi bankruptcy. No such agreement was made for the salaried retirees. … when Delphi plans were terminated in 2009, the salaried retirees faced immense hardship and lost health coverage while unionized employees were protected.” Accessed 2/28/24 at: https://oversight.house.gov/hearing/delphi-pension-fallout-federal-government-picked-winner-and-losers-so-who-won-and-who-lost/
[iii] Bureau of Labor Statistics, “Employee Tenure in 2022,” 9/22/22. In January 2022, median employee tenure (the point at which half of all workers age 16 or older had more tenure and half had less tenure) was 4.1 years. For workers age 25 or older, median tenure was 4.9 years. Accessed 2/23/24 at: https://www.bls.gov/news.release/pdf/tenure.pdf See also: C. Copeland, Trends in Employee Tenure, 1983–2022, Employee Benefits Research Institute, 1/19/23. “Over the past 40 (or nearly 40 years) years, the median tenure of all wage and salary workers ages 25 or older has stayed at approximately five years.” Accessed 2/23/24 at: https://www.ebri.org/content/trends-in-employee-tenure-1983-2022 See also: H. Hyatt, J. Spietzer, “The Shifting Job Tenure Distribution,” February 2016, Accessed 2/23/24 at: http://ftp.iza.org/dp9776.pdf See also Bureau of Labor Statistics, Number of Jobs, Labor Market Experience, Marital Status and Health For Those Born 1957 – 1964, 8/22/23. “Individuals born in the latter years of the baby boom (1957-64) held an average of 12.7 jobs from ages 18 to 56.” Accessed 2/23/24 at: https://www.bls.gov/news.release/pdf/nlsoy.pdf See also: H. R. Hamel, “Job Tenure of Workers, January 1966” Monthly labor Review, Bureau of Labor Statistics, January 1967. Accessed 2/23/24 at: www.jstor.org/stable/41836645
[iv] OECD, Old-age income poverty. “For international comparisons, the OECD treats poverty as a “relative” concept. The yardstick for poverty depends on the median household income in the total population in a particular country at a particular point in time. Here, the poverty threshold is set at 50% of median, equivalised household disposable income.” Accessed 2/28/24 at: https://www.oecd-ilibrary.org/sites/d76e4fad-en/index.html?itemId=/content/component/d76e4fad-en
[v] P. Gramm, J. Early, Another Wrong Way to Measure Poverty: The real rate is 2.5%, but the Census Bureau inflates it by excluding most social-welfare benefits. Wall Street Journal, 12/5/23, Accessed 2/28/24 at: https://www.wsj.com/articles/another-wrong-way-to-measure-poverty-welfare-biden-fd9018b1?page=1
[vi] Congressional Budget Office, The Budget and Economic Outlook: 2024 to 2034, February 2024, Accessed 2/28/24 at: https://www.cbo.gov/publication/59946
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
