We all know the painful truth that traditional defined benefit pensions (never covering a majority of Americans) are fast disappearing … except for public employees, let me say that again, except for public employees.
The Pension Benefit Guarantee Corp., the federal agency that insures private-sector pension plans (for considerable premiums paid by plan sponsors), reports that the number of plans it insures for individual employers decreased from 112,208 in 1985 to 25,600 in 2011.
The decline in pensions is due to several factors; they are expensive to maintain and fund, are highly regulated and costs are unpredictable because many of the factors associated with funding and accounting for liabilities of the plan are beyond the control of the sponsor.
Investments go up and down as do interest rates. Low interest rates are bad for pension funds because they increase the liability calculation that affects a company’s financial results from an accounting perspective. The current low interest rate environment is directly causing the freezing or termination of private pension plans.
Remember how I like to talk about unintended consequences? Well in the case of pensions, government policy and regulation from 1974 (ERISA) intended to provide more security for pension plans has been a major factor in their demise. Government policy to help the economic recovery by keeping interest rates low has hurt seniors by harming pension plans and their fixed income investments.
All this begs the question; how can government alone afford to maintain what in many cases are generous pension plans for public employees while they disappear for everyone else?
QUINNSCOMMENTARY 