Pensions are too risky to plan on
Commentator and economist Peter Lindert says that for all the talk about a Social Security crisis, the real problem is with private pensions and the risks they hold for retirement.
Economist Peter Lindert (University of California, Davis)
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TEXT OF COMMENTARY
KAI RYSSDAL: Boeing's among the companies analysts will be watching this week. The airplane maker's one of the 30 Dow Industrials. It reports first quarter earnings Wednesday, middle of the day. Last Friday, the company said it's considering changes to its pension program. It'll consider offering new hires 401(k)s, instead of a more traditional pension. Probably won't help profits in the short run, but in time it could save some money.
Commentator and economist Peter Lindert's been thinking about retirement. He says that for all the talk about a Social Security crisis, the real problem is with private pensions.
PETER LINDERT: The ongoing debate over Social Security has it all wrong. Our basic retirement problem does not center on Social Security, or on pay-as-you-go, or on defined benefit plans. Our real retirement problem is more private, more fundamental.
Our private job-related pension plans are exposed to multiple risks: employer default, dips in asset markets, inflation, low interest rates and recession. Just diversifying your private portfolio can't eliminate all these risks, especially not if they all happen at once, as they threaten to do right now.
Yes, some of us have the helpful Pension Benefits Guarantee Corporation to fall back on, but the PBGC itself has lost reserves since 2001. If more employers start canceling pensions as if they were air flights, the pension defaults could wipe out the PBGC reserves faster than you can say "savings and loan."
So where are the safe havens, if not in your job-based plan? You cannot just retreat into individual savings. True, if you save more take-home pay it looks better than employer contributions to pensions, but your own nest egg still has multiple risks, with no safety net if your investments go sour. Worse yet, regardless of how you save, you face the danger of long life. We can't all work less than four decades and retire for more than 20 years. Something has to give.
The good news is other countries have come up with political compromises that protect public pensions against economic and demographic risks. Sweden and other countries now protect their defined benefit system with what are called "notional" individual accounts. This means they fix the share of national income paid in public pension benefits, and the overall accounts balance. The tax rate for public pensions never changes, and your retirement benefits move with the nation's income. As a generation lives longer, its retirees get a lower share of taxpayer's money each year, but for more years. If only our private pension plans worked that well. Of course, there's always Social Security.
RYSSDAL: Peter Lindert is a professor of economics at the University of California, Davis. His latest book is called "Growing Public."
