Is the shift away from defined benefit pension plans hurting more than helping?
Today’s pension reform means increasing employee contributions, cutting pension benefits, and switching from defined benefit (DB) plans to defined contribution (DC) plans. In fact, according to a new study from the National Conference on Public Employee Retirement Systems (NCPERS), 15 million additional workers would have defined benefit plans if there had not been a trend over the past 30 years to convert pensions into defined contribution (DC) plans. However, there may be a hidden cost to this approach. As these reforms negatively affect plan participants and beneficiaries, income inequality appears to increase.
In the study, NCPERS looks at the growing debate between DB and DC plans. Those in favor of DC plans claim that DB public pension plans aren’t sustainable and taxpayers can’t afford to pay them. Others defend DB pensions, arguing the pension benefits are a type of deferred compensation and not the responsibility of taxpayers. Regardless of what side of the debate you’re on, here’s the hard reality:
- In a DB plan, the employee receives a lifetime benefit based on years of service and salary.
- In a DC plan, there’s no guarantee the employee will have enough or any retirement income upon retirement.
Income Inequality Worsening for Seniors
Despite the positive aspects of DB pensions, the trend against them continues, and the effects could be damaging. Several studies mentioned by NCPERS point out the reduction of retirement benefits and the shift away from DB pensions increase income inequality—even poverty—in the elderly. One study from the National Institute on Retirement Security (NIRS) found that poverty rates in senior citizen households without pensions were almost nine times higher than those with pensions.
The Economic Impact of NYSLRS Retirees
These are startling findings, considering the important role of pensions and retiree spending in the economy. In the US, retirees spend almost $838 billion each year, which employs millions of Americans and tens of millions indirectly. For every dollar paid in pension benefits, there’s $2.37 in economic output. In New York, retirees play an important role in the state economy. New York State and Local Retirement System (NYSLRS) retirees generate $11.3 billion in economic activity by spending $9.6 billion in the state. The pension benefits earned by NYSLRS retirees flows directly back into the local communities and economies.
As more negative changes affect DB pension plans and retiree benefits, the decrease in retiree spending will be felt throughout the economy.
“Personal income loss has a ripple effect, and everyone suffers when income inequality rises and economic growth weakens,” said NCPERS President Mel Aaronson. “Spending by retirees is vital to communities, yet local spending can easily be undermined by shortsighted changes to defined benefit pension plans.”
New York State Comptroller Thomas P. DiNapoli, Administrator of NYSLRS and sole trustee of the Common Retirement Fund, has often said that DC plans would put more people at risk in their retirement years. During an editorial board meeting of The Syracuse Post Standard last October 20, he also maintained that switching to a defined contribution plan won’t change the state’s obligation to provide a pension to the 1 million people already in the system. “A 401(k) was never meant to be the substitute for a pension,” DiNapoli said.