The American Interest
Analysis by Walter Russell Mead & Staff
The Perils of Putting One's Faith in Defined Benefit Pensions

You might thing that underfunding pension plans is the sole purview of unscrupulous local and state governments. Unfortunately, irrational optimism, an inability to accurately plan for the future, and avarice are all very human weaknesses exhibited by people in all walks of life—even faith-based and church-affiliated hospitals and charities.

The AP has the story:

Pension shortfalls at some religiously affiliated hospitals, businesses and social service agencies are raising new alarms and spotlighting a largely overlooked gap in the law protecting Americans’ retirement benefits.

“I felt betrayed, not only by the health care system, but by the Sisters of Charity, and I got betrayed by the church,” said Armantina Pelaez, a former crisis counselor at St. Mary’s, which quietly converted its federally insured pension plan to an uncovered church plan in 2001. The hospital’s pending purchase by a for-profit company will see Pelaez and others get a fraction of their expected pensions. “They don’t practice what they preach.”

It’s interesting that charities and governments are ripping employees off on pensions worse than private businesses. The answer to this apparent puzzle isn’t that corporate CEOs are somehow more virtuous than men of the cloth or big city politicians; it’s that we have tough laws governing corporate pensions and weaker ones when it comes to charities and governments.

We’ll also take this occasion to remind our readers why we think defined contribution pensions are the best bet for workers today. There are no pension programs that are totally risk free, or course. Life just doesn’t work that way. But too many people continue to underestimate the risk of defined benefit plans in a turbulent economic and political landscape.

Published on October 7, 2013 8:15 am
  • joshuasharf

    Defined contribution plans are better than defined benefit plans because owning a piece of an asset is better than owning a piece of a promise.

  • cubanbob

    A better solution is to make the law equally applicable to public officials and charitable trustees. That said in addition the more optimal solution would require a mandatory contributory plan based on an actuarial sound basis combined with a defined benefits plan aspects guaranteeing a minimum base in the event the pensioner’s plan doesn’t yield the minimum base monthly payment. If memory serves me right that is how Chile restructured its social security program.

  • Tj707

    Everything is and peril. Not just defined, undefined, 401(k)s they are all in peril. The proof have you looked at your savings interest rate lately?

    • Fred_Z

      Interest on liquid assets will be close to zero for a long time.

      Due to our demographic collapse we have lots of non-consuming oldsters, saving, saving, saving.

      Also, a long time puzzle for me: Who in their right minds expects a big return without a big risk? The mere act of saving cash does not deserve a big return, and won’t get it.

  • Bruno_Behrend

    The right is wrong in its blind adherence to the 401(K) ideology.

    The difficulty of successful investing, the numerous products and scams, combined with the lack of sophistication of MOST (even educated) people, simply dictates that the demise of the defined benefit plan is ill-advised.

    Common sense indicates that a viable, transparent, and well-managed defined benefit plan can be, and is, an important part of a good retirement strategy.

    The biggest problem with defined benefit plans is that they are an attractive nuisance to morally suspect politicians and CEOs.

    The vast majority of the public pension problem is a) overly rich benefits devoid of actuarial reality, and b) underfunding, both of which are the fault of craven politicians purchased by public employee interests.

    This is easily addressed.

    As for 401(k) and 403(b) plans, they too are an important part of a good strategy. They are simply oversold.

    Retiring (or being forced out of retirement) while a portfolio is crushed by recession is not something you’d wish on a future population.

    Neither defined benefit nor defined contribution are panaceas.

    • Fred_Z

      You have completely missed the point. A defined benefit plan is absolutely, totally, utterly fiscally impossible in even a slightly uncertain or fluctuating investment climate. Plan administrators would require such huge payments to cover the uncertainty that only a fool would buy such a pension.

      As usual, the left does not try to reverse natural laws, it simply doesn’t understand them at all. As a result it continues to foment policies of instability and be surprised by the results, over and over – the very definition of insanity.

      • Bruno_Behrend

        Fred,

        I haven’t missed any point. I understand your position, and I merely argue that a good financial plan has both individual and collective options.

        Pensions worked great up until CEOs and corrupt politicians either raided them or skewed the benefit structure.

        If others here doubt that, all the need to do is look at the results of Mutual Life insurance companies and broad-based mutual funds, which have managed large portfolios successfully.

        The world is littered with successful defined benefit pension funds. If the management is transparent, and the benefits actuarially sound, there is no reason they ought not work.

        If Illinois’ pensions never had ANY legislative benefit increases, the funds would be 100% solvent, even with the underfunding.

        If anything, Capitalism works too well, creating the greed that eventually destroys it.

  • joshuasharf

    One can have a defined contribution plan with all of the professional management benefits that defined benefit supporters claim. The contributions can be aggregated, the assets moved to more conservative investments as the retirement age of that cohort approaches.

    If someone leaves the plan, they can take their vested portion with them, along with whatever money they’ve put in.

    What the member owns is a piece of an account, rather than an annuity based on a formula, which may or may not have the assets to back it up.