Bashing 401(k)s

401(k) plans, a disaster for retirement security in the private sector, are creeping into public plans with New Jersey likely to announce some ill-thought-out hybrid system later this month to forestall another debt-ratings downgrade.

James W. Russell in Social Insecurity: 401(k)s and the Retirement Crisis lays blame on Milton Friedman, Jose Pinera in Chile, the World Bank, conservative think tanks, and the financial services industry for the demise of the defined benefit system in the private sector and warns that a similar cabal is coming for the public plan system.  That all may be true but his diagnosis of the real situation with public plans, especially in the sub-chapter TARGETING PUBLIC EMPLOYEES AND THEIR PENSIONS, is naively dangerous.  For example….

the threatened bankruptcy of Detroit’s pension plan and resulting reduction of benefits to its retirees are not harbingers for other public pensions.  Detroit is an extreme example of a city that lost its industrial tax base, along with much of its population, and is now dealing with a fiscal crisis as a result. The great majority of states and cities with pension plans are nowhere near that situation now or in the foreseeable future.  Even with Detroit’s very real fiscal problems, there is no necessity to include the pension fund in bankruptcy proceedings.  What Detroit does represent is an example of opponents of public employees and their pensions taking advantage of an extraordinary fiscal crisis to further their aims.  In that quest, they have developed a successful, disingenuous narrative that public pensions are unsustainable and therefore must be replaced with 401(k) plans, as has been advocated for Detroit. (page 70)

What Detroit is an example of is the dodgy actuarials used to gull everyone into thinking these plans are sustainable.  Detroit had one of the highest funded ratios among all government plans shortly before it became convenient for their bankruptcy lawyers not have it so.  People who take public plan actuarial reports seriously are left to wonder: What’s the deal with Detroit’s mysteriously trebling pension obligations?

The conservative think tanks for the most part, not the financial services industry, are behind the campaign to abolish public employee pensions and replace them with 401(k)s. (page 71)

Anyone who really ‘thinks’ should be behind such a campaign, especially those public employees who will be sharing the fate of their brethren in Prichard, Central Falls, and Detroit.

the opponents of public pensions focus on the plans that have the greatest unfunded liabilities and ignore the fully funded ones, presenting the worst cases as typical.  Similarly, they focus on the worst cases of participant abuses – public officials who manage to rig up six-figure pensions for themselves at early ages – rather than typical retirees with modest pensions.  Another part of the arsenal to win public approval for public-employee pension elimination is to present studies based on prediction models that point to soaring unfunded liabilities.  But like all statistical models, a model is only as good as its built-in assumptions.  It is easy to rig any model with arbitrary assumptions in order to obtain desired results. (page 72)

There are of course many examples of public plan models that show these plans as sustainable decades into the future.  They’re called official actuarial reports and are only valid until the bankruptcy people move in.

Despite the success of right-wing think tanks in forming a public perception of public pensions as costly, unsustainable, and unfair, there is a stubborn reality that they are less costly than 401(k)s, sustainable, and fair, if you think that all workers deserve adequate retirement income.  In a careful study sponsored by the National Institute on Retirement Security, economist Beth Almeida and actuary William B. Fornia concluded that “the cost to deliver the same level of retirement income to a group of employees is 46% lower in a defined benefit plan [whether public or private] than it is in a defined contribution plan.” (page 73)

That August, 2008 pager: A Better Bank for the Buck could have been titled “More Fees for Buck (or Flick)” since pension actuaries naturally want to keep the Defined Benefit business thriving.  Though for public plans there is some truth to that cost savings.  If you promise an employee $100 in benefits you would need to deposit $100 into their 401(k) plan whereas if the employee was in a defined benefit plan your contribution, as determined by your paid-consultant, could well be $54 (if you agree to make it).

17 responses to this post.

  1. Posted by skip3house on June 4, 2014 at 3:04 pm

    Why must $100. be deposited now for use at retirement in 401K plan?


  2. Posted by Tough Love on June 4, 2014 at 3:04 pm

    I believe I can quickly point out the problem with James W. Russell’s position.

    He says …”Despite the success of right-wing think tanks in forming a public perception of public pensions as costly, unsustainable, and unfair, there is a stubborn reality that they are less costly than 401(k)s…”

    Well, one could reasonably* argue that 401Ks are more costly (at the individual level) because, lacking the mortality-sharing element of DB Plans, the individual needs to financially prepare for the possibility that he/she will live for a period longer than average life expectancy

    * I said reasonably, because under close examination it loses a lot of it’s steam. Sure, individuals with ONLY 401K Plans are well advised to financially prepare to live 5, 10, even 15 years longer than their life expectancy, but doing so doesn’t change their mortality, and as a group, they will still per life expectancy. That means that substantial funds will be left to heirs to help fund their retirements. Subtract that beneficial component for the need to save more, and the main argument of DC-bashers disappears

    But that’s only half the problem. Mr. Russell carefully stays away from calculating the level annual % of pay contribution into a DC Plan that would be necessary to fund the SAME annual income (even only until life expectancy, and no further) as the TYPICAL DB Plan granted Public Sector workers. Perhaps that’s because the total cost of TYPICAL Public Sector pension is a level annual 30-50% of pay ….over 10 TIMES the 3% of pay that Private Sector employers typically contribute into their employee’s 401K Plans.

    ANY benefit level (small, medium, high) can be funded via a DB or DC. Public Sector Unions/workers refuse to accept DC Plans because there is no possible way that Taxpayers would agree to the huge contribution requirements (30-50% of pay less the employee’s own contribution) necessary to fund benefit levels as rich as they now ROUTINELY get via DB Plans … for which the true costs are easily disguised.


  3. Posted by Anonymous on June 4, 2014 at 3:12 pm

    Elegantly spoke, but BS to the hilt!


  4. To be fair “defined contribution plans” should really be called “undefined contribution plans.”

    After promising defined contributions in lieu of defined benefits in the early 1980s, lots of companies simply eliminated their contributions later, during one of the subsequent recessions. What the 401K has meant is that:

    1) The companies, when seeking workers, can claim they have a retirement plan.

    2) Top executives rather than individual shareholders vote the stock and decide how much to pay each other.

    Basically, if you don’t agree to this deal WITH YOUR OWN MONEY the government charges you more taxes. Which is why there is not an equivalent level of tax break for people investing their money on their own.

    Then again, given the pension shorting in place like New Jersey, perhaps defined benefit plans should really be called undefined benefit plans.

    The bottom line? The generations now in charge are Generation Greed.


  5. Posted by Dave on June 5, 2014 at 7:24 pm

    Another factor which must be considered is that the larger state and municipal DB plans have a large investment footprint and that scares the s*** out of many rich private investors. Think what could happen if the State of Florida plan pulled 500 million of investment from a companies stock and maybe several other states followed suit. And don’t think they don’t have holdings like this, when Enron collapsed the FRS plan lost 400 million. It is staggering to think of a collective action by several large plans interested in changing the corporate culture of a company.


  6. Posted by Anonymous on June 5, 2014 at 10:02 pm

    John, I’m a bit disappointed by your Flick comment. I really had thought you cared about the issues of retirement security and fiscal stability and wanted to find answers, not just exchange insults.


    • Meant no disrespect against Flick who seems like a nice guy from what I see of him at his speaking engagements at actuarial meetings but his conflict of interest should have been disclosed. Beyond that a 46% difference seems absurd and after looking over the paper there are some very questionable assumptions (i.e. saying you only needed enough money for an average retirement period under a DB plan but a DC plan required enough money for a maximum retirement age). It would have been interesting to have seen a debate on the paper rather than having someone like Mr. Russell use it as gospel to justify his position.


      • Posted by Anonymous on June 8, 2014 at 6:39 pm

        I wonder if the guy at that had blogged on a lot of the other papers would write a response if you pointed it out? Know he did one recently agency NIRS’s West Virginia paper.


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