mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
An Ugly Example of the Dangers of Defined Benefit Pensions

Via Lawyers, Guns & Money, our eyes were drawn to a story out of Missouri, where a judge ruled that a mining corporation in the throes of bankruptcy proceedings could cancel out its pension and retirement obligations to 20,000 workers and stop paying into the union pension fund as early as July 1. The details of the story are complicated and potentially ugly, with unions alleging legal chicanery and the corporation claiming that the ruling would help it preserve thousands of existing jobs. The case is headed to a federal appeals court.

But the specifics of this case aside, there is a broader and more important lesson to be absorbed here: If the workers had defined contribution plans rather than defined benefit ones, their financial future wouldn’t be tied to the health of the company they work for.

Defined benefit pensions are part of the blue model system which assumes lifetime employment at stable corporate employers. But the corporate world isn’t stable anymore, and defined benefit pensions expose workers to huge risks. If we were still in a blue model economy, defined benefit plans might make sense, but these schemes are looking dicier and dicier in the actual real world. Plus these pensions often leave workers who are laid off or change jobs short of retirement much worse off and lock people into declining industries, increasing the leverage that employers have over them.

Right now, defined contribution pensions—401(k)s and similar mechanisms, themselves also products of the blue model—are not as efficient as they could be and there aren’t the kinds of consumer protections that would really help workers to make the most of them. This is all blue model legacy—for those inside the old system things worked pretty well, but those who didn’t fit the mold had a harder time.

Those who support defined benefit systems often point to the shortcomings of defined contribution—and they have some valid points as things currently stand. But the right thing to do is to make the defined contribution system better, not to keep people locked up in an increasingly dysfunctional old model.

Edited last paragraph for clarity.

Features Icon
show comments
  • Corlyss

    “If the workers had defined contribution plans rather than defined benefit ones, their financial future wouldn’t be tied to the health of the company they work for.”

    Yes, but defined contribution plans have their own pitfalls. First of all, they depend on the ability and willingness of the worker to save. Now I ask you, if people were all that good at saving, would we be in this mess at all? We might be in a different mess, but we wouldn’t be in the mess created by the combination of peoples’ natural inclination to spend, spend, spend and pressures inherent in an economy that is 70% dependent on consumer spending. Second, even if people are willing and able to save, most defined contribution plans limit the amount the pensioner can contribute as a way of limiting the amount the company is obligated to match. E.g., in the federal government’s FERS pension, the last time I looked the maximum the government would be obligated for was a matching contribution of 10%. IOW even if the worker could afford to contribute 12% of their income to their pension, the government’s contribution would still be only 10% of the workers income.

  • crocodilechuck

    Of course, as the tenured James Clark Chase Professor of Foreign Affairs and Humanities, Mead is the recipient of defined benefit pension from Bard College himself. Going to ‘unlock yourself from this increasingly dysfunctional old model, WRM?

    • Walter Russell Mead

      @crocodilechuck: You would look a lot less like a fool and a blowhard if you took the trouble to get a few facts straight before making ugly remarks about people you don’t know and situations you don’t understand. Like a great many colleges and non-profits, Bard offers employees a defined contribution plan. I like this plan better than a defined benefit plan and I have no wish to change. My recommendation of these plans is based on personal experience.

      Anybody can be wrong, Mr. Chuck. It is a choice to be uncivil. Continuing to make that choice will hurt your career prospects and personal relationships in many costly ways; it will also lead to your being banned on this site.

      Have a nice day.

  • lhfry

    Does this mean that the PBGC will take over the Peabody plan, and if so, what does that mean for taxpayers? I think ERISA prohibits a company from simply abandoning a defined benefit pension plan.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service