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The Case for Defined Benefits and Retirement Security

(Photo: itspaulkelly)


The Case for Defined Benefits and Retirement Security

(Photo: itspaulkelly)

In America, anybody who works for a living should be able to afford to retire.

That's why shunting newly hired and/or existing civil servants into defined contribution or 401(k)-style plans to save taxpayers money, as a new report by the Kellogg School of Management and the Simon School of Business suggests doing, is a bad idea.

Doing this will actually cost taxpayers more money and severely weaken retirement security for all Americans.

This is because 401(k)-style plans are inferior to, and less

efficient than, traditional, defined benefit retirement plans or pensions.

Inferior because few individuals have ever saved enough money through stock market investments in a 401(k) to finance an adequate retirement.

Inefficient because 401(k)-style accounts are more expensive to maintain than traditional, defined benefit plans.

Money managers who administer 401(k)-style plans can collect commissions and administrative fees on the money sitting in the accounts, regardless of whether or not a trade or transaction occurs.

These practices routinely devalue 401(k) style retirement savings by at least 20 percent.

That's why individuals with 401(k)-style plans usually have less than half the benefits of traditional, defined benefit retirement plans.

Worse, taxpayers will have to subsidize these miscellaneous charges, and this will cost significantly more than maintaining traditional, defined benefit retirement plans.

Defined benefit retirement plans protect retirement security by pooling wealth.

The money stays in the system and is there to support surviving retirees.

A 401(k)-style plan will never have the advantages and efficiencies of traditional, defined benefit retirement plans and will never be able to provide the same high level of retirement security.

Retirement systems in other countries based on defined contribution or 401(k)-style plans, such as Chile's, which was imposed under dictatorial rule in 1973, are a complete disaster.

Requiring pension administrators to build up a reserve to meet their obligations to current and future retirees in the case of insolvency presents no imminent danger to taxpayers.

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As long as employee and employer contributions continue to roll in, defined benefit retirement plans will be fine.

This is where the public pension plans administered by local and state governments have fallen down recently.

The Great Recession shrank the investment income of public employee retirement funds, and politicians failed to set adequate levels for pension contributions in good times.

Fortunately, defined benefit retirement plans for civil servants are now making a robust recovery, according to a recent report by the National Conference of Public Employee Retirement Systems (NCPERS).

Retirement systems can cover more than three-quarters of their obligations now, and they are generally considered fully funded when they can cover more than 80 percent of their obligations.

Furthermore, the Center on Budget and Policy Priorities released a recent report saying that, “States have adequate tools and means to meet their obligations.”

People are confusing immediate budget gaps with long-term deficits.

Taxpayers are right to be concerned about how our tax dollars are being spent, especially in light of the billions given to bail out the financial institutions responsible for our current economic crisis.

Given the fact that Wall Street is responsible for our budget deficits at the federal, state, and local level, it's Wall Street, not Main Street, that should bear the cost of cleaning up this economic mess.

Proposals aimed at shunting civil servants into 401(k)-style plans or converting traditional, defined benefit retirement plans into defined contributions plans will only benefit the same Wall Street banks that brought about the Great Recession.

These efforts must be seen for what they are and quickly placed in the circular file where they belong.

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