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Pension Meltdown
Defined-Benefit Pensions Aren't Just Bad for Women—They're Bad for Everyone

The Brookings Institution is attacking public pensions, but rather than taking the usual fiscal-responsibility angle, a new paper argues that defined-benefit pension funds systematically offer women fewer benefits for the same work as men.

There are a number of reasons for this, but the most important one is that women tend to take more time off over the course of their careers, especially to care for children. The structure of most plans makes it difficult for women to catch up once they resume work, even if they eventually work for the same number of years. The exact difference varies by age of retirement, but at age 55, the average woman makes only 85 cents to the man’s dollar from her pension:

Why do teacher pensions appear to fail the equal pay for equal work test?  The main reason is that women are more likely to spend time out of the workforce than men, and defined-benefit pension plans like the one in Ohio tend to punish teachers who fail to meet specific targets, such as 30 years of service.  In my dataset, the average man was working for 96 percent of the included years, as compared to 75 percent for the average woman. Teachers who leave the workforce often cannot make up the lost benefits because benefit increases from additional years of work are offset by fewer years of benefit receipt.  […]

Consider two hypothetical women: one worked every year beginning at age 25 and the other worked most years but spent seven years out of the labor force.  If both women retire at age 55, the first will receive a pension benefit worth 40 percent of her total earnings, whereas the second’s will only be worth 26 percent (equivalent to 65 cents on the dollar).  The second woman can never catch up to the first—the best she can do is work until age 61, when her benefit rate tops out at 32 percent of total earnings.  It is hard to argue that these two teachers received equal pay for equal work.

This study points to a real problem, but what’s most interesting is that defined-benefit pensions actually do a bad job for all employees, male and female, when it comes to providing equal benefits for equal work. People who change jobs are penalized, and other arcane rules shower extra benefits on some while short-changing others.

Equality minded pension reformers ought to take a look at defined-contribution systems. One of the key reasons for the odd gaps in many current plans is that defined-benefit pensions are not based directly on the amount that employer and employee contribute to the plan, which means that two workers who contribute for the same number of years may receive different payouts, depending on specifics of the payment formula like whether or not they took time off. In a defined-contribution plan, benefits are tied directly to the amount contributed. As Education Next notes:

Public school teachers are almost universally covered by traditional defined benefit (DB) pension systems. The employer has an obligation to provide a regular retirement check to employees upon their retirement, based on a legislatively determined formula (see sidebar). The key characteristic of DB systems is that the benefit is not tied to the contributions that individual teachers and employers make to the pension fund. That is what distinguishes DB from defined contribution (DC) plans, known more popularly as 401(k)-type systems. […]

The underlying problem with DB systems is their distortion of retirement incentives, stemming from the broken link between benefits and contributions. DC systems and cash balance (CB) plans restore that link.

Moving public pension systems to a defined-contribution model would create a safe, sustainable, transparent, and fair pension system, for women and men alike. This is a reform whose time has come, and we hope more cities and states adopt it.

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  • Boritz

    “…the broken link between benefits and contributions”

    Breaking this link in most aspects of life the the central goal of a great American political party.

    • S.C. Schwarz

      Exactly. The point, for the left, is that everything, pensions included, needs to be political. Oh, excuse me, I meant “fair.”

    • Jim__L

      Breaking the link between social mores and reality is another central goal of the Left.

      The whole idea of keeping statistics on women’s earnings vis-a-vis men’s ignores the simple biological fact that women are the ones that have children, and very young children are not just physically but also emotionally tied to their mothers in ways that prevent mothers from working the sort of 80-hour-a-week schedules necessary for career advancement these days.

      Equalizing the lifetime earnings of men and women is simply not a reasonable goal.

      Add to that the fact that motherhood is critical to the maintenance of our late-life social safety net, and there’s just no escaping the fact that traditional husband-wife-children families are in the interest of any sustainable society. Period.

      That needs to be normative, and our laws need to reflect that.

  • Thirdsyphon

    It’s not clear to me -and the Brookings paper does not attempt to argue- that defined contribution pensions are or would be any fairer to women than defined benefit pensions have been so far. In fact, if anything, the paper’s analysis tends to the opposite conclusion.

    According to Brookings, women are getting short shrift under defined benefit pensions for two reasons: lower wages relative to men, and fewer years spent in the workforce. Under defined contribution plans, all other things being equal, womens’ lower wages will result in correspondingly lower contributions and thus lower benefits in retirement. Their time spent away from the workforce, which tends to occur relatively early in their careers, would cause more damage under defined contribution plans, since early year contributions to such plans are “worth” more than equal contributions made later in life, while defined benefit plans usually place equal value on each “year of service.”

    Also, defined benefit pensions allow women to recoup some of their economic losses relative to men by virtue of their longer life expectancies. Defined contribution plans do not. In fact, under a defined contribution plan, a longer projected lifespan becomes almost a kind of financial liability.

    In sum, while there are some solid arguments to be made against defined benefit pensions as an institution, gender equity is very much not one of them.

    • Corlyss

      “It’s not clear to me -and the Brookings paper does not attempt to argue- that defined contribution pensions are or would be any fairer to women.”

      I wondered about that too. If you figure the reason women are disadvantaged in the workplace at all is because they take off to have kids and raise a family, esp. in this era when so many are single moms, there will perforce be times when they simply can’t contribute to their retirement fund. No contribution, no employment=no retirement fund. I acknowledge the stock market’s need for investment in the stock market but it’s magical thinking to believe that investments will always go up, that individuals will never need to withdraw funds committed for genuine emergencies, or that boom and bust cycles are completely eliminated from the financial system. The best system ever invented was the one that’s no longer sustainable, where commitments are contractual and permanent, someone else pays, and your contribution is minimal. But as I said, it’s no longer sustainable. I return to my mantra: a nation cannot have simultaneously an economy 70% based on consumerism and high savings rates to self-fund pensions and old age health care. It’s simply impossible.

    • Andrew Allison

      Not only that, but the study was specifically of teachers pensions, not pensions in general. Sloppy thinking.

  • Anthony

    Retirement can be expensive and guaranteed benefits (defined pension plans) rely on returns growing faster than economy as a whole – the inherent risk borne elsewhere probably is behind much of contention currently surrounding issue. Feed infers Defined Benefit vesting period may work against women but its accrual aspect (generally back loaded) may work against any prospective employee. “Retirement is expensive and can’t be paid for simply by relying on super normal returns somewhere.” Thus, issue may require more than shifting from DB to DC (especially as one examines higher benefit value projections).

  • Charles Hurst

    Mitt Romney was asked along these lines a similar topic during the debates. What he would do to bring women to equal levels with men in pay and such. And Romney babbled on about women in the work force etc and cowered.

    Here is what he should have said. What is keeping you from medical school? Or engineering school? Or trade school? Or opening your own business. Golly I didn’t realize women were barred from such. I’ll get right on that. Oh, wait a minute—they aren’t barred at all. And the
    last I heard the engineering salary wasn’t based on gender once graduated. Or there is something else too—called opening your own business. Try it sometime if you like.

    Then I would have told her to sit down and shut up. And possibly pick up a book from Ayn Rand. Who was a real feminist. Or note a few real feminists who are under that title CEO. Or maybe check in with Michelle Malkin who is a minority and a female. Gee how did she ever make it?

    There is no war on women. You have every opportunity a man does. Don’t confuse missing a promotion because you have to take time off with children. That is not up to the business to cater to. Don’t act like the professional fields are barred to you. But if you major in social
    feminism then you’re probably going to get that low end job. Because it is an easy major with no market value.

    Quit whining and quit crying. Because basically you, the radical feminist are acting like a little girl who can’t compete. Versus the many I know who already have. Note there are no tears.

    Charles Hurst. Author of THE SECOND FALL. An offbeat story of Armageddon. And creator of THE RUNNINGWOLF EZINE

  • Bruce

    Wouldn’t women also have low pensions because the actuaries know they will be paying benefits to women 7 years longer than they pay them to men?

  • Jane the Actuary

    The issue at hand is that the traditional Defined Benefit pension plan is based on a final-pay formula, such as 1.5% of final five-year-average pay times years of service. If you’ve got 40 years of service, you get 60% of your final pay as your pension.

    This is great for someone who’s had a full career at a single employer. But compared to a defined contribution-type plan, benefits are very heavily backloaded, because of the time-value of money (the value of the accrual at age 64 is much greater than the present value of the accrual at age 24), and provide much greater benefits to someone with a full career at a single company than someone who’s moved jobs — even disregarding the risk of losing benefits entirely by not being vested, if you leave an employer at age 30, then your benefit at retirement from that employer is based on your pay at age 30; if you had stayed, then it’s your pay at age 64. This makes a big difference, and it’s part of what makes traditional defined benefit plans so generous to long-career employees, relative to DC plans: the relatively small share of the benefit going to job-hopping employees.

    (Side note: the UK solves this by mandating that the accrued benefits for employees who terminate be increased each year by inflation, so that they retain some of their value. Of course, the UK has a number of mandates that served to make DB pension really, really expensive, and pretty much nonexistent except as closed or frozen plans. So let’s pass on that idea.)

    But there’s no reason why “defined benefit” has to be equivalent to “final-average pay plan.” The oft-maligned cash balance plan was actually, in part, an attempt to solve this by providing even accruals throughout an employee’s career, and “fair” benefits for employees who leave while young.

    Another option is the third-party pooled plan, as provided for in legislation proposed by Tom Harkin (summary/comments here: )

    But the point is that there are other solutions besides a wholesale change to Defined Contribution plans in which individuals bear all investment and longevity risk.

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