Wednesday, September 24, 2008

Gihilarducci on Defined Benefit Pensions are Dead; Long Live DB Pensions

Teresa_ghilarducci Teresa Ghilarducci, Bernard L. and Irene Schwartz Chair of Economic Policy Analysis The New School for Social Research, and  author of “When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them," has penned this response to the recent blog post we did on Zelinsky and the 401(k) Lessons from the Crash of 2008.

I appreciate Zelinsky calling like it is -- the so-called 2006 Pension Protection Act and the DOL regulations privilege a faddish approach to investing which is overweighted towards stock. (Zelinsky calls it a “enshrining stock-based approach in the law.”) Government paternalism, though is not the problem as Zelinsky characterizes it. He calls the government’s default option for automatic 401(k) contributions, "paternalism." The problem actually is the government’s lack of caring. The Paulson – Bernacke plan proposes a bailout of the investment firms with very little new regulation and maintaining the same legal biases toward 401(k).

The government should do a lot more, I call for a democratic “paternalism.” Instead of giving investment banks a way out – the government is providing a market for their junk assets – it should be giving near retirees and retirees the option to clear the junk out of their accounts and transfer them to government guaranteed bonds. I describe these vehicles in my new book; they are called “Guaranteed Retirement Accounts.” Every worker would get $600 annually from the government in exchange for investing 5% of their pay every pay period to invest in a retirement account that the government would pay 3% indexed for inflation.

The government is now pursuing a misguided message – retirement security can be achieved through 401(k) accounts. What all workers need is access to the same investment vehicles that most public sector workers have, including all federal workers, and most unionized workers. All workers need a secure vehicle, like a defined benefit plan. All workers deserve to put their retirement dollars in a vehicle that guarantees a low–fee and safe return. If we swap tax breaks for 401(k) plans (70% got to the top 20% of wage earners) for a $600 contribution to a guaranteed account for all workers it would cost the government nothing and help the people who need help the most– unlike all the other proposals swirling around.

Please feel free to send your comments to me if you would like to add your two cents to this most timely of debates.


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My younger associate and I were driving back from a seminar at a credit union where the featured speaker was from Social Security and many audience members were soon to retire from General Motors.

I pointed out how fortunate they were as they were going to receive a Defined Benefit retirement plan.

They were the last generation who would retire with 30 or more years of service with a guaranteed pension unlike his generation who would have to rely on a 401(k) plan.

I am 63 and vested in three Defined Benefit plans from three employers. Although not equal too what the average GM worker receives, I am nevertheless grateful for them.

Posted by: Richard VandenBrul | Sep 25, 2008 7:36:59 PM

I recently posted about creating a universal defined benefit plan where the worker could take out the plan if their employer did not offer a defined benefit plan, and contribute into the plan. I think we agree on this point - that defined benefit plans are the means to secure retirement, not 401(k) plans. A $600 contribution yearly contribution simply isn't sufficient to provide for a secure retirement over an average retiree's life span. And defined benefit plans do not need more regulation. The Pension Protection Act has just about regulated very small plans (1-10 participant) plans out of existence without any benefit being provided to the plan for the increased regulation.

Posted by: Suzanne L. Wynn, Esq., LLM Tax. | Sep 25, 2008 9:26:33 PM

Ghilarducci calls herself a pension expert but clearly has no clue about the formula to create a pension. If a retiree needs a minimum of 10 times final pay, or the salary right before retirement, the employer contribution needs to be at least 9% of pay, which is it in Australia.

Posted by: Jane White | Sep 26, 2008 9:05:16 AM

Your suggest tax preferences are inconsequential to the decision to save? Perhaps so for low income Americans who pay little or no taxes. So, you would disrupt today's savers to try to reach the 33% or more of Americans who live paycheck to paycheck? What makes you think a government "match" will be any more effective than an employer match in a 401(k). Many studies show 20% - 30% of those eligible for a plan with a company match regularly forego participation if they must take action to enroll.

Let's give PPA's embrace of automatic enrollment features a chance to fully take hold. Let's try to get them enrolled at an early age - to leverage the time value of money, to ensure they save for a longer period of time, and to develop a savings habit in younger Americans.

Check success stories at

Posted by: Jack Towarnicky | Oct 5, 2008 2:52:41 PM

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