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.
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 Since then, the adoption of DB pension plans by new businesses has virtually halted and has been replaced by the adoption of 401(k)-type pension plans that permit voluntary employee contributions (Munnell and Sunden 2004).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