As most readers don’t check back on old Tax Update posts for comments (and bless you if you do), I’ll call attention to the back-and-forth between me and Pulitzer-prize winning tax beat writer David Cay Johnston on the merits and evils of defined benefit plans.
My view is that defined benefit plans are a time-bomb for government finance, as the actuarial games available to politicians and their confederates in public-employee unions are an irresistible temptation to understate liabilities and funding at the expense of future taxpayers. I cite the near-extinction of defined benefit plans in the private sector as evidence that they don’t work well.
Mr. Johnston insists that defined benefit plans work better in theory, and the problems they face in practice are just the work of evil administrators and poorly-designed regulations. It reminds me a little of the kids I knew in college who insisted that even though Communism had never worked so far, that’s only because it just hadn’t been done right.
By returning to the wise practices of the Happy Days era, where our parents happily drove to work for 40 years at the engine plant, DB boosters imply, we can again have secure monthly checks to help us buy our unfiltered cigarettes after retirement.
Except the golden age wasn’t. Megan McArdle points out that the nostalgia for DB plans is misplaced, pointing at this from Andrew Samwick:
My colleague Jon Skinner and I made that comparison in an article in the American Economic Review. The result was that the projected distributions of retirement income were surprisingly similar under the old-style DB plans that were dominant in the 1980s and the 401(k) plans that supplanted them in the 1990s, assuming workers were covered by the same plan over a long career. (The comparison was better for 401(k) plans when workers switched jobs — vested deferred benefits under DB plans are often quite low.)
In truth, this should not really come as a surprise. The amount of retirement income that will come from pensions is determined by workers’ willingness to give up current earnings for current pension contributions, regardless of whether they are making the contributions directly or the employer is (allegedly) contributing for them. If 401(k) plans are proving to be inadequate, it is because we are a nation of inadequate savers, not because we had a great system of DB pensions that we no longer have.
The problem, Samwick concludes, is not that we used to have fantastic defined benefit plans, and now we don’t–DB plans also take big hits when the market falls, and though they do have a government backstop which 401(k)s don’t, they also make a mid-career job loss utterly catastrophic. So there’s no clear winner on the security side.
Even under Mr. Johnston’s idealized scenario, DB plans only work with large stable employee bases. But the “dream” of getting a factory job out of high school and working at the same place for 40 years is a pipe dream in the modern economy, where changing jobs every few years is much more common than staying in place for a long time.
As for Mr. Johnston’s defense of such plans in the public sector, the unfolding public defined benefit pension disaster speaks for itself. It’s hard to find comfort in assurances that the theory works when the practice has been catastrophic.
Tags: Andrew Samwick, David Cay Johnston, defined benefit, megan mcardle
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
More nonsense above:
“Even under Mr. Johnston’s idealized scenario, DB plans only work with large stable employee bases.”
False. Provably false.
Actually, as I wrote, you can buy an individual defined benefit plan any day of the week. Prudential, New York Life, all the big insurance companies sell them. So if these reliable and profitable companies can figure out how to do this profitably the mechanism has a market basis.
Your description continues the indications that you think a pension plan is a welfare scheme rather than earned, that your ideological glasses warp your perception of well established facts with centuries of history.
You should do some reading.
The public pension plans that are underfunded are in that shape because politicians, Christie Whitman when she was governor of New Jersey being a prime example, cut money going into the plans and used them to finance tax cuts. The workers fought like hell to prevent that, but failed.
Hmmmm, how interesting. Unionized workers negotiate for a solid and sound compensation package and along come vote-seeking (dare we say rent-seeking) anti-tax politicians who end up costing the taxpayers more, not less, because they violated well established, centuries old economic practices.
There is no free lunch.
There are plenty of sound DB plans.
Your communist reference should embarrass you. It demeans you and civil debate.
The reality is you have no facts to back up your positions, do not know the history of these matters and write from what you imagine to be facts. Your posts suggest the reality is that you just dislike DB plans (which were on the wane in the 80s, contrary to the additional nonsense above).
David, I’ll let your response and the facts I have outlined and linked speak for themselves. Thanks for playing.
Ahem.
Mr Johnston wrote:
“Actually, as I wrote, you can buy an individual defined benefit plan any day of the week.”
Yes, they’re called *annuities* and they are based on actual, realistic actuarial assumptions because the insurer puts its own assets at risk.
Not so with an Public Employee DB plan.
Mr J goes on to opine that “you think a pension plan is a welfare scheme.” While I wouldn’t dream of speaking for Joe, I would simply point out that the facts are indeed on his side. One can’t help but notice that Mr J seems to take undue umbrage at the accusation. Methinks it’s because the truth hurts.
The estimable Mr J continues:
“The public pension plans that are underfunded are in that shape because politicians …cut money going into the plans.”
You are of course entitled to your own opinion, but not your own facts. The *facts* are that the politicians have not been “cutting” the contributions; quite the contrary, as can be seen in the very public results that occur (cf WI, OH, etc) when politicians *do* attempt to do so.
Then there’s this little tidbit:
“Unionized workers negotiate for a solid and sound compensation package and along come vote-seeking”
That’s a no-no, Mr J: we’re talking about *public* sector unionized “workers,” not “unionized workers” in general. As has been previously pointed out to you, there is a world of difference between the two, the most notable of which is that in this scenario, there is no adversarial negotiation.
Your conclusion (such as it is) that Joe has “no facts to back up [his] positions” is a classic example of projection.
Back under your rock, sir.