The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers

Conventional opinion says the disappearance of traditional defined benefit pensions is the fault of profit driven greedy employers even given that barely 50% of workers ever had a pension.

However, the reality is that government regulation and a changing workforce were the main drivers. Government provided incentives not to offer a defined benefit plan while a workforce not aligned with long-term employment with one company became far more prevalent.

Now government at federal and state levels seeks legislation and incentives to get workers to save on their own.

Consequences‼️

Historical Trends

For the last quarter of a century, the occupational pension structure in the United States has been shifting from DB to DC plans (Buessing and Soto 2006; Copeland 2006; Wiatrowski 2004). Analysts have attributed the trend to a number of factors. First, government regulations have tended to favor DC plans over DB plans (Gebhardtsbauer 2004; Ghilarducci 2006). This began in the early 1980s after Internal Revenue Service regulations implemented a provision of the 1978 Revenue Act, which allowed employees to make voluntary contributions to employer-sponsored retirement plans with pretax dollars.2 Subsequent tax legislation enacted in the 1980s, including the Tax Equity and Fiscal Responsibility Act of 1982 and the Tax Reform Act of 1986, reduced incentives for employers to maintain their DB plans (Rajnes 2002). Since then, the adoption of DB pension plans by new businesses has virtually halted and has been replaced by the adoption of 401(k)-type pension plans that permit voluntary employee contributions (Munnell and Sunden 2004). One study found that increased government regulation was the major factor in 44 percent of DB plan terminations in the late 1980s (Gebhardtsbauer 2004). Another study noted that from 1980 through 1996, government regulation increased the administrative costs of DB plans by twice as much as those of similar-sized DC plans (Hustead 1998).

Second, the employment-sector shift away from manufacturing toward service and information technology decreased the availability of DB plans, as new firms in growing sectors of the economy adopted DC plans instead (Wiatrowski 2004). These structural changes in the economy are estimated to explain from 20 percent to 50 percent of the decline in DB pension plans (Clark, McDermed, and Trawick 1993; Gustman and Steinmeier 1992).

Finally, some analysts suggest that worker demand has partly contributed to the popularity of DC plans over DB plans (Aaronson and Coronado 2005; Broadbent, Palumbo, and Woodman 2006). They assert that employees prefer DC plans because these plans are portable across jobs, balances are more transparent, and assets are managed by employees themselves (Broadbent, Palumbo, and Woodman 2006; Munnell and Soto 2007).

The Pension Protection Act of 2006 may fuel the trend away from DB plans and toward DC plans by increasing DB plan reporting and disclosure rules, requiring stricter DB funding rules, making permanent the increases in DC contribution limits in the 2001 tax cuts, and facilitating the use of default participation rules in DC plans (AARP 2007; Center on Federal Financial Institutions 2006). Beyond this, the financial situation in 2008 resulted in at least a one trillion dollar loss in the value of assets held in private-sector DB plans (Munnell, Aubrey, and Muldoon 2008a) and another trillion dollar loss in state and local plans (Munnell, Aubrey, and Muldoon 2008b). Although the economic crisis has hurt the funding status of DB plans, legislation signed on December 23, 2008, will provide some pension funding relief (Groom Law Group 2008; Klose and Tooley 2009).

Source: The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers

10 comments

  1. Thanks BenefitJack for the concise look at the important parts of the DC/DB changes. Not being in HR myself, I knew of various legislation and changes adopted but it went in one ear and out the other.

    I knew I had a pension benefit but like most workers was “too soon old and too late smart” as the old saying goes.

    Good perspectives you guys.

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  2. The idea to ask the retirees really makes sense. All I can say is that I would not have been able to retire when I did without my pension.

    I fear for my kids and grandkids.

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    1. Same here. But the value generated by my pension is the result of nearly fifty years with the same company. If I had changed jobs every four years or so as has been the case with workers for many years, my pension(s) then would be pretty worthless.

      Dick Richard D Quinn Blogging at Quinnscommentary.net and HumbleDollar.com Twitter @quinnscomments

      >

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      1. Median tenure of American workers has been < 5 years for the past 5 decades – back to the 1970's (when they started measuring in that method). Your 50 years with one employer, and my 25 years with one employer have ALWAYS been the exception. The academics/researchers who wrote the piece for Social Security are also the exception to the rule.

        So, academics/researchers who bemoan the passing of defined benefit pension plans have always, and will always overstate workers perceived value of a final average pay, defined benefit pension plan.

        If DB plans were so great, why didn't the Fortune 100, most of whom had a final average pay defined benefit pension plan in 1980, simply amend the plan to add employee contributions – to the extent they could not fund the cost and achieve their financial objectives?

        Simply, the "return on investment" was never sufficient, and once human resources and finance weenies had metrics that confirmed those results …

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      2. Given the long term average job tenure, if that was true at employers offering a DB plan, those plans would provide little value to many in that workforce. I suspect that job tenure in industries with pension plans may have been longer than the overall averages.

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      3. Averages are deceiving. At my last firm, the average tenure was 10+ years but median tenure at that firm was 66 months – yet less of all individuals hired at that firm vested in the DB pension plan.

        Assuming everyone with 5 years of service vested in their defined benefit pension plans, and that median tenure was just less than five years, it means that more than half of all individuals hired by a specific employer in a specific year failed to vest.

        Here’s an example of 1,000 empoyees hired in year 0, where only 400 or so continued employment for 60 months and vested, based on actual turnover rates at my last firm:

        Percent Number Who
        Typical turnover at my firm: Turnover Left Remain
        Before one year of service, 15%, number who left: 15% 150 850
        After 1 but less than 2: 21%, number who left: 21% 179 672
        After 2 but less than 3: 17%, number who left: 17% 114 557
        After 3 but less than 4: 15%, number who left: 15% 84 474
        After 4 but less than 5: 14%, number wholeft: 12% 67 417
        5 or more: NA: number who vested: 417

        As you note, you had 50 years, I had 25 years. Most people have < 5 years. The fact that some vest and get a pension benefit has no effect on the others who didn't hang around long enough to vest.

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      4. True that your pension would not have accrued to a high level or no pension had you shifted jobs frequently. However, consider that staying with an employer that doesn’t have a defined benefit plan accrues nada. Pension plans were disappearing whether someone worked 50 years or 5.

        The workforce changed and jobs changed and the benefits changed over the past 50 years. My son joined a large utility about 20 years ago. His pension benefit is minuscule compared to those who started working as late as the 1990’s. He stays because he likes his job, not because of a pension. Will this affect his retirement? Yes it will but not because he isn’t putting in the years.

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      5. One last comment. I do want to confirm that a beginner, studying labor economics, would asset that for you (or me) to have that lucrative defined benefit pension plan, you and I had to forego other compensation – that your total rewards would have been the same without the DB pension (“on average, and averages can be and here would be deceiving for sure”) just paid in another form.

        That is, by staying with the same employer for 25 or 50 years, we gave up likely greater, though different rewards. We see this all the time among rehires.

        I actually took action, amending our final average pay pension plan, retiree medical coverage, and paid time off benefits, to attempt to curtail the windfall that rehires used to obtain by leaving, and later returning to my firm.

        In the mid-1990’s, when I took a look at our workforce, I actually found that just less than 1 in 12 of our workers had, at one time or another, left our firm AND later returned as a rehire. This issue became apparent to me because of all of the acquisition and divestiture activity we had experienced in the late 1980’s and early 1990’s. In one particularly interesting example, we had an individual work for just over 10 years, leave the firm in the 1970’s (after we had amended the plan for ERISA to vest at 10 years), and return in the mid-1990’s as part of an acquisition – as an executive with the acquired firm. I calculated that, when we recredited his service, and applied the 3 year final average pay out of the last ten years of service requirement, he had no other compensation in the last ten years – so we used his current period covered compensation – more than tripling the value of his DB pension.

        That is, he had gone to another firm that did not have a DB plan, as a much younger employee, in search of greater direct compensation, achieved that, and when he returned as an older employee, we stupidly rewarded him with a windfall when we acquired his firm.

        I always felt that my pension was deliberately depressed because of that windfall, and many many more much much smaller windfalls that were bestowed on rehires.

        We changed how we treated rehires – everywhere we could without violating anti-cutback.

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  3. I wonder if there more defined pension plans today would we still have this great resignation that we see with workers? After being told that they were non-essential workers, being paid to stay home, and then found a work life balance, would a pension make a difference? What is keeping employees in place other than wages and medical? Job satisfaction? Although more people quit bosses than jobs.

    I know that I reached a point when I was working that I was ensuring that I was protecting my pension. I was one of the last who still got a pension where I work because all new hires went on the contribution plan in I believe 1996.

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  4. This is history. At least set the record straight.

    The article you posted was from 2009.

    NO! The DB pension plan was NOT replaced by 401k plans. The decline in DB plan adoption, continuation and participation started as soon as employers realized, slowly at first, that, after ERISA, they would have to make workers eligible at earlier ages, vest benefit accruals AND fund their commitments.

    All the people cited in the article you used failed to recognize that Section 401(k) was added by the 1978 Tax Act as a means for Congress to CURTAIL tax deferred contributions to thrift savings and profit sharing plans. The Joint Tax Committee believed what Congress said when passing the legislatoin. They believed that the current rate of deferrals, now per 401(k), would remain at the same level, or DECLINE, due to the new non-discrimination rules. So, the Joint Tax Committee scored the change out as having no impact on federal tax revenues for the federal budget!

    Congress never intended for 401k plans to become popular.

    You and I were there! We saw it happen!

    The decline in DB pension plans started before the first 401k features showed up in 1981. And, importantly, few employers adopted a 401k plan in the 1980s – the initial growth occurred because EXISTING thrift/savings or profit sharing plans ADDED 401k features. That was my experience at Marathon (1984), at Cooper (1983), at Tenneco (1984), and at Nationwide (1984)!

    My bet is that most of the people who wrote that 2009 article are employees of public employers, and, are likely still covered and accruing benefits under defined benefit pension plans using final average pay formulas.

    The difference? The difference between public and private sector employers and employees?

    Ask yourself, who pays?

    See: Syl Schieber, A Statement on The Effect on Private Pension Plans of Pension Provisions In the Tax Equity and Fiscal Responsibility Act of 1982, 4/11/83, at: https://www.ebri.org/docs/default-source/testimony/t-14.pdf?sfvrsn=1e23342f_4

    See also: https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf

    Pre-ERISA, yesterday’s defined benefit pension plans were not today’s lucrative defined benefit pension plans. For example, my own defined benefit pension plan had the following features prior to ERISA:

    Eligibility age: 35
    Vesting: 15 years of service, Rule of 45
    Formula: Career average
    Employee Contributions: 2% of pay
    Subsidized Early Retirement: No
    Post-retirement COLA: No

    Simply, before ERISA, many plans did not vest prior to separation and few plans were well funded.

    Declines in single employer pension plans corresponded with ERISA’s requirements that plans be funded and that benefits vest. As plan sponsors terminated underfunded plans, the unfunded liability that was shifted to the remaining pension plans (to fund PBGC liabilities with premiums) increased significantly.

    As you know, the multi-employer plans were (and are) the worst funded plans; even today. It is not as if we didn’t know of the issue. Remember, it was President CARTER who reformed multi-employer pension plans when he signed into law the Multiemployer Pension Plan Amendments Act of 1980. 1980!

    While PBGC liabilities for single employer plans have moderated, multiemployer plan unfunded liabilities were at all-time highs – until YOU, taxpayers, people without pension plans, BAILED THEM OUT!

    The 2021 PBGC Annual Report which says, in part: “… The Multiemployer Program’s positive net position of $481 million at the end of FY 2021 is in sharp contrast to the negative net position of $63.7 billion at the end of FY 2020, a drastic improvement of $64.2 billion. …”

    Thanks all you TAXPAYERS, almost all who don’t have a pension plan, as well as Americans too young to vote and generations yet unborn, for your financial support of the bail out of union pension plans.

    Click to access pbgc-annual-report-2021.pdf

    And, keep in mind that a taxpayer bailout was always the goal for union pension plans.

    See ERISA: The Most Glorious Story of Failure in the Business:’ the Studebaker-Packard Corporation and the Origins of Erisa, Buffalo Law Review, 11/13/01. “… This is what happened in the Studebaker case. … the union had to protect members from default risk. One option was for union negotiators to bargain for higher levels of funding. The union rejected this approach because it would require slower growth of pension benefits—which would lead older employees to be less willing to retire—or larger employer contributions—which would result in lower wages for active employees. Instead … union pension experts developed a proposal for a government-run insurance program that would guarantee the obligations of defined-benefit pension plans. … Termination insurance would shift default risk away from union members and make it unnecessary for the UAW to bargain for full funding. … The lack of vesting in UAW plans was not an oversight. Union bargainers appreciated the importance of vesting, … A more liberal vesting provision means that more employees will qualify for benefits. If the amount of funds available for pensions is limited, more liberal vesting and lower levels of forfeitures require lower levels of benefits to employees who do qualify. Conversely, a plan with limited resources can pay higher pensions if fewer employees qualify. …” See: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=290812

    Yes, all of those private sector employees and employers who pay taxes to fund those lucrative pension benefits for those public employees don’t have one themselves. And, yes, the politicians who approve lucrative benefits expect, AND RECEIVE, financial and voter support in return for their “negotiation” of lucrative salaries, incentives and benefits on behalf of those public employees.

    But, most importantly, we no longer have lucrative, non-contributory, final average pay formula, defined benefit pension plans, with early retirement incentives and automatic post-retirement cost of living adjustments – not because of greedy employers, but because workers did not value them.

    Way, way back in 1986, we did a study of our benefit plans. The 401k scored out at 90+% favorable, even though only 2/3rds of workers were eligible (we used three year eligibility and immediate vesting). How about our lucrative, non-contributory, three-year final average pay formula defined benefit pension plan with early retirement incentives and an automatic post-retirement cost-of-living adjustment? It scored out as 35% favorable, ~40% neutral, and 25% negative! In fact, because the plan was non-contributory, and because most workers separated prior to completing 10 years of service (and they never vested), there was a significant percentage of workers who while eligible, receiving SAR notices, etc. didn’t even know they had a DB plan. It was something that paid off after age 65 or something (akin to after death for most of our employees under age 50).

    Even later, after complying with the Tax Reform Act of 1986, and reducing eligibility to 1 year of service and age 21, and changing vesting to 5 years, worker perception of the pension did not improve.

    The former Chief Legal Officer, after looking at the results, recognizing that his lucrative pension might be at risk because of the crappy return on investment, suggested we survey retirees!

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