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Talking Retirement with the Presidentís Economic Recovery Advisory Board

istock_000006360812xsmallNIRS recently participated in the President’s Economic Recovery Advisory Board Retirement and Savings Working Group meeting to discuss solutions to ensure all Americans can be self-sufficient in retirement.

The Board is chaired by former Fed Chairman, Paul Volcker and includes leaders from corporate America, labor, and academia. The panel also heard from other retirement experts and academics including NIRS Academic Advisory Board Members Alicia Munnell and Teresa Ghilarducci.

NIRS commended the panel for its comprehensive examination of all aspects of the nation’s retirement infrastructure, but focused its remarks on the importance of traditional defined benefit pensions to middle class retirement security.  A summary follows.  (The full remarks are available here and the supporting handout is here.)

Pensions work – they provide adequate benefits in a cost-efficient manner.  Pensions have been enormously successful in providing the means for millions of ordinary Americans to remain members of the middle class in retirement.  Researchers have determined that pensions are highly effective at ensuring that retirees have sufficient resources to support themselves in old age.

Equally important, pensions are the most economical means of converting savings over a career into adequate, secure income streams in retirement.  Professional investment management of assets coupled with pooling of longevity and other risks means pensions need fewer dollars on the “front end” in order to pay benefits on the “back end.”  In fact, a 2008 NIRS study found that a pension can get the job done at about half the cost of individual accounts.

And pensions prove their worth in economic conditions like those we are experiencing right now.  Retirees and near-retirees with pensions are not the ones we are reading about on the front pages – their retirements have not been “wiped out” in this economic storm.  This suggests that directing policy attention to stabilizing, strengthening, and indeed expanding defined benefit pension coverage is a necessary goal.

In the short run, stabilizing and strengthening existing DB plans means supporting the efforts of plans to rebuild their reserves.  Heading into the economic downturn, most pension funds in both the private and the public sectors had set aside ample reserves that should allow them to continue paying benefits for decades.

The severe investment losses incurred in the last year do mean that plan sponsors and participants may have to consider tough choices as they focus their efforts on rebuilding their reserves.  But with sufficient time and discipline, most funds will recover.  Policymakers can support plans and sponsors that need “breathing room” in this recovery, by recognizing the long-term nature of these plans.  Also, we should be cognizant that predictability for plan sponsors is an important ingredient for long-run sustainability of pensions.

In the longer run, expanding pension coverage will require retooling pensions for the 21st century.  Fundamental changes in our economy dictate the need for new structures that better meet the needs of both employers and employees.  Existing, successful structures like those in state and local government, and in the multi-employer sector point the way to what pensions of the future might look like:

  • Administered by single-purpose entities, governed by strict fiduciary standards
  • Pooled structures that encompass many employers, making benefits portable
  • Funding and investment policies that support long-term sustainability
  • Shared responsibility between employers and employees

Americans support a range of policy solutions to enhance retirement security.  Americans are very supportive of policies that could expand traditional pensions.  84% agree that government should make it easier for employers to offer pensions.  And similar proportions think it is a good idea for the government to help small employers to access multiple-employer pension arrangements.

In other words, Americans are looking to Washington for sensible solutions that work.  Thankfully, when it comes to improving retirement security, there are common sense approaches that can help – steps to make defined contribution plans look more like pensions supporting existing pensions as they rebuild their reserves, and, over the long haul, retooling pensions for the 21st century.  

Download the full remarks here and the supporting handout here.

Posted by:  Beth Almeida, NIRS Executive Director, June 2, 2009

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