In lieu of defined benefits, some states and localities are mulling a shift to 401(k)-style pension plans, reports Jeannette Neumann for The Wall Street Journal:
Republicans have taken the lead in campaigns to make the switch. In February, Florida Gov. Rick Scott called for a shift to 401(k)-type plans when he proposed his budget. Former two-term Minnesota Gov. Tim Pawlenty called for a shift before stepping down in January. Nevada Gov. Brian Sandoval also proposed a switch in his January State of the State address.
State lawmakers across the country, many of them Republicans, have echoed the calls. A California state senator recently introduced a bill proposing that new public employees enroll in 401(k)-like plans.
There are two big problems with this switch. First, as Neumann notes, there can be hefty short-term costs associated with switching to a 401(k) plan, or a hybrid, 401(k)/defined benefit plan. Once closed, a traditional pension fund would begin to shift its asset allocation toward less-risky investments. In the short-term, she writes, “that shift can reduce the plan's investment returns, leaving the employer needing to pay more.” Eventually, however, employers will begin to pay less for their employee’s pensions, and in the long run, this will probably outweigh the short-term hurt.
By contrast, workers aren’t particularly advantaged by 401(k)-type plans. In addition to higher contributions while employed, workers run the risk of retiring with less than adequate funds, due to economic downturns and market fluctuations. As The Wall Street Journal noted a few weeks ago, “The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement.” This remains true even after you include Social Security and other retirement income. Here is a chart to illustrate the point:
Throwing more workers into 401(k)-style plans is bound to leave more workers unprepared for retirement, especially given people’s tendency toward not saving and the uncertainty inherent in market-based retirement plans. This won’t be a problem for upper-income workers or others who work in relative comfort and can continue working through old age, but it will prove devastating for lower-income workers, who aren’t paid well enough to set aside large sums for future consumption, and -- particularly in the case of manual laborers -- aren’t capable of working through old age.
A large population of impoverished seniors is far more of a problem than fixing long-term Social Security deficits, and in a world where that made sense, we’d consider more generous Social Security benefits, with higher taxes and more immigration as a way to pay for them. As it stands, our “serious” elites are focused on ways to cut Social Security, as if these less-fortunate seniors (and soon-to-be seniors) didn't exist.
