COLUMN-A landmark law at 40: How well is it protecting workers' retirements?
(The writer is a Reuters columnist. The opinions expressed are his own.)
By Mark Miller
CHICAGO, Sept 2 (Reuters) - Every American who has retired with economic security - or hopes to - should know these two dates in our history: August 14, 1935, and September 2, 1974.
The Social Security Act was signed into law by President Franklin D. Roosevelt in 1935, and 40 years ago today President Gerald Ford signed landmark pension reform legislation aimed at protecting the interests of Americans in private sector pension programs. The Employee Retirement Income Security Act (ERISA) was signed on Labor Day 1974.
These are the two of our most important laws governing the retirement security of Americans. And today's ERISA anniversary is a good moment to ask: How are we doing when it comes to protecting the retirement security of everyday Americans? And how are these two laws connected?
For the answer, look no further than the two most important words in ERISA's title: income security. Unfortunately, we're not living up to those two words very well.
Since ERISA's passage, we have seen a profound shift from defined benefit pensions to defined contribution plans, mainly 401(k)s. Pensions are a promise by employers of lifetime income in retirement; 401(k)s are a promise to contribute a certain amount to your account while you are working.
Evidence is mounting that we need to get focused on income again.
Performance of the defined contribution system is a mixed bag. Some higher-income workers have accumulated sizable sums, though most don't have a clue how their nest eggs will translate into income. Lower-income workers have negligible savings.
Most public sector workers are covered by defined benefit pensions, but coverage in the private sector has evaporated since ERISA's passage. The National Institute on Retirement Security (NIRS) reports that 38 percent of private sector workers received income from a traditional pension in 1979 - a figure that plunged to 15 percent in 2010.
And the trend is accelerating, with a growing number of private sector pension plan sponsors unloading pension obligations by making tempting lump sum buyout offers to workers (reut.rs/1sHHGbo).
The substitution of 401(k)s for pensions comes as Americans are living longer, making retirement more expensive and risky. And it isn't what lawmakers envisioned in 1974 when ERISA was passed, says Josh Gotbaum, who stepped down last month as director of the Pension Benefit Guaranty Corp. (PBGC), the government-sponsored agency that insures most private sector defined-benefit pensions through premiums paid by plan sponsors.
"Congress passed ERISA on the assumption that employers were going to offer lifetime income pensions - the only issue was how they would do it. But the response from employers has been increasingly not to offer lifetime income solutions to workers."
ERISA was the legislative response to problems with under-funded pension plans, especially the high-profile 1963 shutdown of the Studebaker auto manufacturing company, in which 4,500 workers lost most of their pension benefits. Among its sweeping provisions was the creation of the PBGC. When companies fail and pension plans are terminated, PBGC takes over, and most workers receive a high percentage of their promised benefits.
PGGC data offers one indication of ERISA's impact. Last year the agency covered 42 million workers and retirees who had been in 24,440 now-defunct pension plans.
But Gotbaum thinks it's time for some new public policy to address our retirement income problems.
Take, for example, the two main options plan sponsors have for offloading pension risk. They can offer lump sums, or they can outsource pension obligations to insurance companies, which pay out the benefits as annuities. Lump sums are 10 percent to 15 percent cheaper for plan sponsors, because of the interest rates used to determine the value of buyouts.
"We also place greater fiduciary obligations on a sponsor who goes to an insurance company and buys annuities for their workers than we do for the lump sum," Gotbaum says. "That's crazy."
Gotbaum would like to see regulatory changes that encourage more flexible pension plan design, such as hybrid or cash balance plans that generate regular checks for retirees but ease some of the risks carried by sponsors. He would also like to see a "safe harbor" provision that make it easier for sponsors to add annuity options to their 401(k) plans by easing their fiduciary obligations.
But from where I sit, the best solution to our current retirement income problem lies outside the private pension system. If employers don't want to step up to the task of providing retirement income, let's have Social Security do it.
Financial planners say retirees should shoot to replace about 80 percent of pre-retirement income to ensure a comfortable retirement. Social Security was designed to put a secure floor under retirees - it replaces roughly 40 percent of income, according to the program's actuaries. But that figure will fall to 36 percent by 2030 as a result of reforms enacted in 1983.
Retirees need to come up with the rest through savings or pensions from their employers. Had Congress known in 1935 that pension plans would evaporate, perhaps it would have made Social Security a more robust program.
"You always hear people saying that Social Security wasn't designed to be the only source of retirement income," says Diane Oakley, executive director of the NIRS. "But the reality is, unless you're in the top 25 percent of income, Social Security is your only resource for retirement."
Progressives have been mounting a case for beefing up Social Security benefits, especially for low- and middle-income workers - and they have a good case. Perhaps we'll get there on a future Labor Day.