At one time, defined benefit pensions were the most common retirement plan for working people. Workers in both the public and private sectors enjoyed the security and reliability of pensions in planning for retirement. These workers knew that if they worked hard and played by the rules, they would be able to enjoy a dignified retirement thanks to their pension. Unfortunately, the private sector has largely abandoned defined benefit pensions over the last three decades. This has led to a worrying decrease in retirement security among working families.
Defined benefit pensions follow a common formula in both the public and private sectors: years of service, multiplied by salary and by a benefit multiplier, yields a defined benefit amount, typically paid monthly and guaranteed for life. On average, public pensions tend to be slightly more generous than private pensions. Typically, though, public sector workers earn less than their private sector counterparts. For these public sector employees, their pension is a valued job benefit and they are often willing to forego salary increases in exchange for the security provided by their pension.
Both public and private pension funds took a hit during the Great Recession. There is no denying the financial crisis had a negative effect on pension funds. Remember though, the recession hurt nearly all Americans: millions lost their jobs; thousands lost their homes; and many saw their retirement savings in 401(k)s and IRAs wiped out by the downturn in the financial markets. Pension funds were not alone in being harmed by the Great Recession, nor are they alone in struggling through the slow economic recovery since the crisis. The thing about pensions, though, is that they have time to recover. Pension obligations are never due all at once. Pension benefits are paid out over decades and as some members retire, new members join the pension system. Investment returns may be low one year- or for several years- but pension funds will still be there when the markets improve and returns increase.
The worrying trend in the private sector is how quick companies were to abandon defined benefit pensions. The Reagan administration opened the floodgates when they allowed companies to offer 401(k) plans to all of their employees and not just wealthy corporate executives. While 401(k)s may work fine for those wealthy executives, they are a poor replacement for pensions for everyday working families. Furthermore, several new laws passed since the mid-1980s, culminating in the so-called “Pension Protection Act of 2006”, increased both costs and regulatory burdens for private companies to offer pension plans. These laws only accelerated the move away from defined benefit pensions.
The decline in pensions in the private sector has coincided with a decrease in retirement preparedness among the American public. At some point, our political and business leaders must wrestle with the question of whether abandoning pensions in the private sector was a good decision for working families. While we were heartened to see the Democratic Party embrace protecting pensions in their party platform, we wish retirement security was more widely discussed in the presidential campaign.