Public sector pensions are a model to emulate – not to cut

March 14, 2011 | Alex Stone

A recent article in the National Journal titled Golden Years? notes the gap between public and private sector retirement benefits has grown because today’s private sector workers have lost so much ground:

In 1985, about four in five workers at medium- and large-sized private firms received a defined-benefit pension, according to federal statistics. Today, less than one-third are covered under such plans. Instead, most workers at large and medium private companies who receive…benefits at all obtain them in the form of defined contributions. In small companies, defined-benefit plans are virtually extinct – and only about one-third…receive a defined-contribution retirement benefit. [emphasis added]

Why does the shift from pension (defined benefit) to 401(k) (defined contribution) plans matter? Under a defined benefit plan, workers contribute to a single pension fund managed by the employer. The pension pays out a pre-determined amount to eligible retirees. If the market crashes or poor investment choices are made, the company is still responsible for benefit payments.

But under a defined contribution plan, things are very different:

First, when the stock market crashes, individuals (who have far more limited earnings potential) can’t absorb the losses as easily as a corporation’s defined benefit plan. So the worker bears all the risk of losing their retirement fund.

Second, workers pay far more to Wall Street, where money managers siphon off several percent in management fees from each worker’s fund. That’s quite lucrative for the financial sector, but not so much for your average middle-class type.

Public sector workers have largely avoided this cost and risk shift thanks to collective bargaining agreements that preserve defined-benefit plans – though not without controversy. Although public sector workers typically receive lower total compensation than their private sector counterparts, some people (such as the author quoted above) claim private sector workers have come to resent those pensions – especially following the market’s most recent crash.

If it does exist, that resentment misses the mark completely. We won’t restore retirement security for private sector workers by stripping public employees of their retirement benefits – that’s nonsensical. Rather, we should take a hard look at why private sector retirement security has eroded, and put new public policies in place to restore some measure of dignity and security to people in their golden years.

Removing the cap on taxable earnings for Social Security (currently at $106,800), and using the increased revenue to bolster benefits for middle- and working-class Americans, would be a good start.

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Posted in Retirement Security

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