Why are pensions the best option?
Several decades ago, many companies in the private sector began to close their pensions and replace them with 401(k)-style accounts. As that generation of workers is beginning to retire, the numbers are startling. When all households are included—not just households with retirement accounts—the median balance of retirement savings for those near retirement age is $12,000. Many working people and their families—around 38 million households—have no employer-sponsored retirement account at all. Without a change, millions of Americans will retire into poverty.
A traditional, defined benefit pension ensures that as a worker ages, they and their family will have access to a consistent, modest income that will allow them to retire with dignity. The median pension is about $15,500 a year.
The median pension is about $15,500 a year.
Why are pensions the best option for taxpayers?
Sometimes, you can have your cake and eat it too. Pensions provide public employees with a more secure retirement than 401(k)-style accounts. They are also the most cost-efficient way for a state or municipality to fund a retirement system.
With a pension, the contributions of all workers and the employer are pooled together and then invested. By far the largest source of income—over 60%!—into a pension are the returns on these investments. Because these investments are a driving force behind pensions, they are significantly more cost-effective than running individual 401(k) accounts.
The most cost-efficient way for a state or municipality to fund a retirement system.
What about all of this talk about ‘unfunded liabilities?’
Failed politicians cite ‘unfunded liabilities’ when they’re looking for an excuse to break their promise to firefighters, nurses, teachers, librarians and other public employees. Pensions are long-term, perpetual entities. Like a home mortgage, there is a long-term liability, but the bill is not due immediately. Pensions are pre-funded with both employer and employee contributions that are invested.
Like the rest of us, pensions suffered during the Great Depression, but now they’re rebounding. Many state pensions are well above 80% funded, and most are on the right track to be well funded over time—the average funding ratio grew from 72 percent in 2013 to 74 percent in 2014.
The average funding ratio grew from 72 percent in 2013 to 74 percent in 2014.
Okay, so why are some people attacking pensions?
The same kinds of people who tried to privatize Social Security would love to see pensions go away. Why? Wall Street stands to make enormous profits off of managing 401(k) accounts. Because pension funds are pooled together and professional managed, there’s much less room for profit on Wall Street.
Most public workers remain in pension plans and most pensions have rebounded from the Great Recession. While some politicians continue to try to break their promise by reducing benefits or moving away from pensions all together, almost all states have maintained their defined benefit pensions in recent years. Retirement security protects workers at both the start and end of their careers, retirees and taxpayers.