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The purpose of today’s blog was to point out that defined benefit retirement plans can be structured in a way that is less risky to the employer and can still provide the employee with a guaranteed retirement income. It was not an attempt to defend the City of San Diego’s current plan. In fact, I believe I have been critical of the way that plan was designed and how it has been implemented. Nevertheless, there were still comments like these from Billy Bob Henry (I corrected his typos):
“Hey Andy, try going out into the REAL WORLD and see how hard it is just to find a 3 percent match on a 401K, and you can forget about a defined benefit pension, the only place you find those today is in the Fantasyland of government employment.”
I wonder if BBH read the part where I work in the PRIVATE SECTOR and our members have to compete for work everyday with other contractors who provide little or no benefits to their employees. I doubt BBH could explain how this is possible, but our association has been in business over 100 years. I guess our member contractors have not been hurt by having a well-run defined benefit plan for their employees.
“These new employees will have a choice, take the job or not. City employees…
Again, a little off-topic but let me try a response anyway. Employers who have the attitude that Please expressed generally have trouble recruiting employees. The result is we end up with arguments like “Those are jobs Americans won’t do.” The same writer also said:
“I’m pretty tired of the give me more attitude … For my money I want the city to be well managed—on time and on budget and the pot holes fixed.”
It sounds like you are the one with the give-me-more attitude. You want all the services, but you don’t want to pay for them.
Others, though also not where I was hoping to go, were a little more thoughtful. Jeff wrote:
“I notice that the Mayor’s proposed new pension plan reduces both City and employee contributions by 50 percent while the reduction in benefits appears to be much less than that. I don’t see how the numbers add up.”
Short answer: They don’t, but it doesn’t really matter because the goal is to do away with the DB plan in its entirety. Why else would the Mayor demand to keep a small DC component when the unions were offering to eliminate it completely and save the City even more money?
To Pension Watcher, two words: Compound interest. Look them up. Let’s take just the first $6,000 annual contribution in your example. If this money was invested for 30 years at 8 percent, it would grow to more than $65,000. Add in the other 29 years of contributions, and your hypothetical employee would have more than enough money available to buy an annuity.
To Watcher: I am not knowledgeable enough on your issue to comment. I do know that our association has been around for more than 100 years and I will do whatever I can to make sure that all our employees receive the pension they were promised.
Now to the topic of DBs vs. DCs: A defined contribution has all the same unavoidable risks that are present with a defined benefit plan. The difference is that they fall on the employee and many think that makes a DC the preferred option. If those risks were actually the reason some DB’s have had problems, I would probably agree. However, as I pointed out earlier they are not. The problems have been self-inflicted and correctable.
Defined contribution plans have two inherent risks that defined benefit plans do not, either of which can be devastating to a retiree:
Short-term investment losses: The person that decided to retire last year and the person who decided to retire in 1999 both probably have to return to the work force. There is simply no time for a retiree to recover from a significant investment loss. A pension plan, on the other hand, can easily ride out the inevitable downturns in their investments.
Outliving your life expectancy: If I live to be 85 and am living off my 401K, I better hope that I was able to save more for retirement than the average person would need. If I didn’t, my last five to seven years are going to be very uncomfortable financially. If I was living off a defined benefit plan, I would have no such worries and neither would the plan since only average mortality, not individual mortality, has any effect.
If I have been at all successful in my quest today, hopefully you will look at defined benefit plans in a different light and not simply think it best to convert everyone to an IRA or 401K.