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22
Mar 2011
Why pension plans are good for workers

Traditional pension plans have been a proven retirement vehicle for many decades. While ambitious politicians can blithely proclaim that the era of defined benefit plans is over, as we mentioned in our previous post, millions of Americans will soon find that 401(k) plans will have failed miserably to provide them with a secure and dignified retirement. It’s becoming increasingly clear that reliable and secure retirement incomes cannot be provided by 401(k) plans.

Congressman Devin Nunes recently introduced a bill in Congress that is misleadingly titled the “Public Employee Pension Transparency Act.” The real objective of his bill can be found in Nunes’ own words, delivered at a recent gathering of public pension plan opponents.

“So what this will only set up, what the folks in the private sector have figured out a long time ago, was that you have to get away from the defined benefit plan (pensions) and somehow get to a defined contribution (401(k)-style plan).”

How does Nunes propose to “somehow get” rid of defined benefit public pension plans? By legislation that would falsely inflate pension fund liabilities. Nunes’ bill would require public pension plans to report their returns using an absurdly low assumption rate, the rate of return for treasury bills. That rate is currently at 3.6%, half the assumed rate used by most public pension plans and drastically lower than that used by corporate defined benefit plans. The lower the return rate, the worse the funded status of public pension plans would appear to be.

Fitch Ratings, an independent rating agency for government debt, rejected the approach of Nunes and his allies a few weeks ago. Fitch stated they would use a 7% assumption rate in evaluating the soundness of public pension plans. Fitch added that the vast majority of governments would be able to meet their obligations to public pension plans, despite the current pressure on budgets.

Sorry, Congressman Nunes, but we and you know the real problem. As we have pointed out, and as the Wall Street Journal recently reported, the true retirement crisis is the dismal failure of the 401(k) plan to provide an adequate retirement. Tens of millions of Americans who’ve enrolled in 401(k) plans are now realizing they do not have, and will not ever have, enough money to retire in a secure and dignified manner.

A Congressman truly concerned about hard working Americans should be holding hearings and advancing legislation to address the serious problem of 401(k)s, not trumping up misleading legislation designed to “somehow get” more people into that failed system. It is transparently clear that Congressman Nunes does not have that goal.

Pension plans, like those offered to Los Angeles City employees, provide monthly pension checks – a reliable, stable income that retirees cannot outlive. In contrast, a defined contribution 401(k) retirement plan provides no established monthly pension, and it provides nothing to fall back on when the savings account is depleted.

The fact is that pension plans create retirement security while 401(k) plans create retirement insecurity.

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