What’s Wrong With Our Retirement System And What We Can Do About It

Source: Richard Shea, Pension Research Council, June 25, 2015

What’s wrong? As the Baby Boom moves into retirement, confidence in our retirement system is waning, for good reason. Plan sponsors, including public and private employers, are rapidly freezing their defined benefit plans—those that promise a guaranteed level of income in retirement—by closing the plans to new hires or stopping current employees from earning additional benefits.

When legally permitted to do so, some plan sponsors are even cutting back benefits employees have already earned. Municipal pension cutbacks growing out of the Detroit bankruptcy offer one recent example where previously earned benefits already have been cut. Congress provided another example late last year when it authorized severely underfunded multiemployer pension plans to reduce previously earned benefits of collectively-bargained employees. Meanwhile, Washington is awash in proposals to cut back, tax away, or means test Social Security old-age benefits whenever a political opening makes that feasible. ….

….. How did this happen? How did we—one of the richest and most financially savvy societies in history—come to this juncture? The answer lies in how our retirement system allocates risk and fails to be creative about new ways to structure retirement plans. ….

….What can we do about it? The extreme bipolar allocation of risk in our retirement system described above has become increasingly dysfunctional. The assumption that plan sponsors must assume either all or none of the major risks of providing retirement benefits is driving many of our largest institutions—both governments and businesses—from assuming any retirement risks at all and causing them to shift those risks entirely onto individual participants. An obvious alternative would be to share those risks rather than shift them….