In recent decades, defined benefit pension coverage has declined for private sector workers. This issue brief finds that funding volatility is the primary culprit, not pension costs. It also identifies opportunities to reverse the trend.
A wide body of research has focused on the numbers of companies trending away from pensions, yet substantially less attention has focused on the specific reasons why. In 2005 only 33% of private sector employees with workplace retirement plans had pensions, yet coverage was at 85% in 1975.
This research brief examines the root causes behind the trend and finds that:
- Pensions are effective for employers and employees. Pensions offer employers a cost-efficient, useful workforce management tool for employee recruitment and retention. For employees, pensions help ensure adequate and predictable income in retirement.
- Despite the advantages of pensions, private sector employers have been closing and freezing their pensions due to onerous laws and regulations enacted since the 1970s, including the Pension Protection Act of 2006. These rules created complicated funding rules, and increased contribution volatility when employers need steady, easy-to-estimate costs from year to year.
- Companies may not understand that employees value pension benefits. NIRS research indicates that nearly nine out of ten Americans believe all workers should have a pension to help ensure retirement security, and some 84% believe policymakers should make it easier for employers to offer pensions.
- Private-sector industry shifts have seen fewer new industries offering pensions. For example, the number of domestic manufacturing jobs with long-tenured employees has declined, while there has been a growth in information technology companies that typically have employees with shorter average tenures.
The research brief also sets forth policy changes that could help reverse the trend of declining pension coverage for private sector workers. These include:
- Changing pension law so that plan funding is less volatile.
- Enabling employees to share the cost of pensions by allowing pre-tax contributions to the plan.
- Designing pensions so that they are portable when an employee changes jobs.
- Creating an avenue for third-party sponsorship of a pension plan.