Don't rely on defined benefit pension plans; demand defined contributions

Neither employers nor the government can take away retirement accounts you own

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It is fast becoming clear that the grand illusion of defined benefit pension plans is rapidly becoming unraveled as the spectacle of workers who have contributed to such plans now face the possibility of losing all or part of their benefits due to the bankruptcy or financial exigency of their employer.

Such plans have traditionally been favored in the public sector because politicians can use them to negotiate lower wage contracts by promising future lavish pension benefits without having to raise taxes, negotiate increases in pension contributions or put aside the assets necessary to actually fund the pensions they promised.

Such promises are inevitably justified by such unrealistic “projections” as a 7 percent or more return on pension assets. By the time the chickens come home to roost and cities face a financial crisis when the most extravagant pensions become due, the politicians who stayed in power by making such promises are usually long gone and face little accountability. Just ask the hapless retirees who thought the federal Pension Benefit Guaranty Corp. might bail out them or the city workers of Detroit.

Large private corporations have used the same deceptive methods to induce employees — particularly unionized employees — to accept lower wage packages in return for insufficiently funded promises of future defined benefits. At the time labor contracts incorporated such schemes, they appeared to be to the mutual advantage of both labor and management. They let managers off the hook by allowing them to pay lower current wages, while labor leaders happily sold contracts to their members on the basis that management’s promise of lavish future pensions would more than make up for less-than lavish wage increases.

For both corporations and public sector employers, the most seductive feature of defined benefit plans was that they didn’t have to set aside sufficient actual assets to make good on their most extravagant pension promises and that deficiency could easily be covered up by making unrealistic projections of yields that could only be achieved by putting principle in jeopardy.

As the grand illusion of defined benefit pension plans continues its inexorable collapse in both the public and private sectors, only one class of employees stands to possibly escape its devastating effect: federal employees. Promised pensions for federal employees can be satisfied by simply printing more money or borrowing it from China. But for private sector businesses and hard-pressed states, counties and municipalities that have no access to the printing press, the collapse of defined-benefits plans promises yet more economic pain.

The 800-pound gorilla of defined benefit plans has yet to be realistically dealt with — namely Social Security, whose benefits many of its beneficiaries continue to believe are “guaranteed.” In fact, the Social Security statements sent to beneficiaries make it clear — albeit in fine print — that future benefits are not guaranteed at all, but rather subject to the whims of future legislators in Congress. They can be changed or reduced at any time.

When benefits were initially promised, there were 20 or more workers supporting one retiree. Now that the baby boomers are retiring, it’s as few as two or three workers per retiree. Who really believes future young legislators in Congress will be willing to tell their constituents they must make up for this demographic tsunami by supporting dramatic and confiscatory increases in their regressive payroll taxes?

Were Social Security to be reformed by requiring the government to fund individual private accounts with actual assets (such a U.S. government bonds paying 3 percent to 4 percent interest), no future Congress could invade such accounts and diminish them without violating the due process clause of the Constitution.

One of the great mysteries of our time is why so many Americans still cling to a system in which benefits are not guaranteed, not protected by the due process clause and return only a 2 percent yield.

Workers not willing to leave their retirement to the vagaries and uncertainties of politics and the business cycle should not only accept defined contribution plans when they are offered, they should outright demand them.

Robert Hardaway is professor of law at the University Of Denver Sturm College Of Law.

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