Two recent reports- on unrelated subjects- have highlighted the importance of pensions for low-income working families. The Employee Benefits Research Institute released a report last month that focused on the ability of defined contribution plans and defined benefit plans to replace income in retirement. A separate report from two Princeton economists noted an alarming rise in deaths among less educated, middle-aged, white Americans. In different ways, they both emphasize how important it is for low-income workers to have access to a pension.
The headlines around the EBRI report were somewhat misleading. “401(k)s beat pensions for higher income replacement rate” was a common refrain. What the report actually said was that for high-income workers, defined contribution, 401(k)-style plans offer a higher income replacement ratio than defined benefit pensions. This makes sense. For workers in the top income brackets, they are able to contribute significant amounts to 401(k) plans and thus replace more of their income in retirement. The recent report on CEO retirement packages that we discussed last week demonstrates how well-paid executives are able to save vast sums of money in tax-deferred, defined contribution accounts.
The important fact hiding in the EBRI report was that for low-income workers, defined benefit pensions were better than defined contribution plans at every level of income replacement. Again, this makes sense. Low-income workers do not have the resources to contribute significant sums of money to 401(k)-style plans. Also, because their incomes are low to begin with, it is easier to replace a higher proportion of that income in retirement with a defined benefit pension. Studies have shown that defined contribution 401(k) plans benefit the wealthy and do little for low-income workers. This report from EBRI is further confirmation of that fact.
The Proceedings of the National Academy of Sciences does not typically write about pensions, but a recent article from Princeton economists Angus Deaton and Anne Case contains an important claim about pensions and retirement security. Their study focuses on a startling rise in deaths among middle-aged, non-Hispanic, white Americans with a high school education or less. They find that the primary causes of these deaths are not chronic diseases like lung cancer or diabetes, but instead deaths from despair such as suicide, drug and alcohol poisonings, and chronic liver disease. The authors speculate that one cause of this increase in mortality could be economic insecurity. As they say:
“The United States has moved primarily to defined-contribution pension plans with associated stock market risk, whereas, in Europe, defined-benefit pensions are still the norm. Future financial insecurity may weigh more heavily on US workers, if they perceive stock market risk harder to manage than earnings risk, or if they have contributed inadequately to defined-contribution plans.”
In other words, if you’re worried about being able to retire with financial security, you may be more likely to face mental health battles that lead to suicide or alcohol abuse.
Both reports highlight just how important it is for low-income working families to have access to the safe and secure retirement offered by a pension. When irresponsible politicians and anti-pension ideologues threaten to gut pensions, we need to remember that people’s lives are at stake.