Defined Benefit Pensions: A Failed Experiment
Posted by David Miller, Jan. 22, 2010
After the town hall meeting I attended on Wednesday I have been thinking about pension plans generally. The state of Utah is looking at changing their pension offerings for new employees to save the state from future financial ruin. I have seen other companies go through that process already. As a nation we have seen the cost of defined benefit pensions contribute mightily to the downfall of GM and Chrysler as well as having a hand in the struggles throughout the airline industry not so many years ago.
As I thought about all these examples I realized that even a fully funded defined benefit pension program is a gamble for any organization. Employees like the security, but it is an inherently risky proposition to offer such a plan.
I decided to look into the history of pensions and as with so many other systemic problems we face, the problem of widespread pension offerings really took root as a result of a poorly conceived government intervention, namely wage freezes during WWII where companies began exploring new ways to compensate workers besides simply using salary as compensation. Notice that this is also at the root of our dysfunctional employer-dependent health insurance boondoggle. The fact that both of these crippling trends were incubated by government wage interference and nursed along afterward through favored status in our tax policy should be a major red flag against further socialist economic moves by our government – no matter how good it might look now there is bound to be a crippling downside that will rear its ugly head later.
January 25th, 2010 on 11:53 am
Many socialists simply DO NOT CARE about the moral hazard of the policies they promote.
Some are arrogant enough to suppose that they are so smart that their programs will avoid such problems.
Others purposefully ignore such matters because, in their minds, the supposed pros of their programs outweigh any insignificant cons. It’s not that collateral costs don’t exist; it’s that these folks are absolutely convinced that such costs don’t matter.
Given the shaky employment market (including where I work), my Mom asked me recently what I would do if I lost my job. I explained to her my plan of action. She then asked, “What about your pension? Wouldn’t you lose that?” She was a little surprised when I explained that I have no “pension,” but that I have a 401k that is fully transferable to any IRA.
I have been investing in my retirement since I was in my early 20s. Even when I worked for the Federal Government, I came on board when new employees used the 401k plan rather than the civil service pension plan.
Defined benefit plans make little sense in today’s dynamic employment market.
January 25th, 2010 on 2:05 pm
Defined benefit plans are another way, like employer sponsored health insurance, to discourage people from changing employment. As you said, considering the fluidity of our employment these days it makes less sense for employees than it did a generation ago.
I would say that while many socialists don’t care about the moral hazards of the policies they promote and other socialists ignore the dangers, I think we must acknowledge that the majority of socialists (the majority at the grassroots level at least) are simply ignorant of the cancerous downside of socialism. They simply accept the rosy picture painted by their “benevolent” ideological leaders without ever taking an objective look at the implications of the policies they subscribe to.
January 25th, 2010 on 2:44 pm
That may be true. But I find that when I try to enlighten such folks about the collateral damage caused by socialist policies, they will often agree to a certain extent, but they will then express their assurance that their programs must be carried out anyway. After all, they say, “we can’t just let people suffer.” Reason does not always win.
January 25th, 2010 on 3:17 pm
No, reason does not always win. I wish it did, but if it did we could be confident that eventually we would get out of the mess we are in now. As it is, we must use reason, and hard work, and then hope that we are able to convince enough people that the tides turn and we return to sustainable policies.