In my Algorithmic Management Post, I attempted to break down an academic concept to be something that’s more easily digested by a professional reader of this blog who may have kids, and family, a career, social commitments, civic pursuits, maybe a part time gig, etc.. You know that life thing. It takes a good amount of time to take the complex and make it understandable. This is why academic papers, even the great ones, aren’t on the bestseller lists.
In the spirit of that post I’d like to do it again based upon the what the Department of Labor says about pension portability. Well the original post on the DOL website is really more about pension and healthcare but i’m going to just concentrate on the Pension or defined benefit retirement program which is a critical part of the 3 legged stool of retirement.
Right off the bat the article discussed how the Pension is an Employer benefit designed to attract and maintain quality workers. It then goes on say that the plan can have huge losses for the employee if they opt to leave the company. So the point of the article is to really discuss what regulations exist, and can exist to allow for pensions to move with the employee, i.e. pension portability. All in all not a bad idea considering most employees in the modern era where the culture is to only stick with an employer for a few short years before they move on.
The article talks about how the early days before the Employee Retirement and Employee Retirement Income Security Act of 1974 (ERISA) vesting was a wild west. It also discusses why vesting regulated to be less than the current length of 5 years hasn’t gained much interest because the way pensions are structured by indexing benefits to a calculation that includes salary and length of time served. If either of those are low then the benefit is low. If your job hopping every few years at least one, and possibly both will be low for your career. The article comes to the conclusion that you could force employers to take into account the work history of the employee and give them credits.. But this would be very expensive unless everyone was mandated to do it. Employers would simply eliminate pensions or refuse to hire older workers.
The article goes into the possibility of a mandatory option for a lump sum distributions and the debate surrounding allowing them.
It then defines the origin of the three government options:
- Create policies that would require employers to offer a pension,
- Create new incentives to encourage employers to offer pensions
- Changes in tax and social security policies that would affect the desirability of pensions for workers and firms
It also describes how debated changes to the tax code including consumption tax, tax changes on savings, and changes in social security benefits could all change the incentive for offering pensions. All in all it’s a dry, but good read on how the thinking of government has been as it relates to Pensions.
Some thoughts I had while reading it were:
First Point: It’s interesting to me that this conversation even exists because it’s sort of like the chicken / egg scenario. If there were strong pensions for all employees, they’d stick around longer. Since there are so much fewer pensions there is more transition, so more need for regulations allowing for traditional pension portability. Forget the fact that the idea of employers providing for something as important as retirement is insane. It was a good idea when it started as a way to recruit good employees for very dangerous jobs, but in today’s modern economy we are beyond that.
Fallacy: The Pension, 401K, retirement system should exist only for quality workers. It should also exist for the crappy ones too. Yes, there are idiots, lazy workers, adult children, and those addicted to drama in their lives. No matter if these people are functional enough to stick around a company for a month, a year, or for twenty years they need a solid retirement. I’m not saying this to be some sort of socialist pollyanna. I’m saying it because it’s good long term planning. They were a pain during the working years when they bounced from job to job. These are the exact people who will be a huge drain on society if they are only living off of social security.
A half baked solution is better than none: At one point the article goes on to say that there isn’t attention given for a regulated shorter vesting period because of the limited benefits to the worker. The example is the calculation based on a 35 year old worker with three years of service earning about $100/month in today’s market (or $200 month in thirty years) This doesn’t make sense to me, because if that same worker had worked another 9 companies using the same formula of 10 years each, their vested benefit is approximately $1,000 / month. Ok, not great, especially when you consider what they would have gotten if they stayed and grew with the same company. But do you know anyone who would throw away $1,000 a month on top of Social Security and on top of any 401K they were mandated to have? By itself it’s not much, but combined with the other two legs of the stool it’s significant. I agree that changing the vesting time isn’t the answer, but it’s not a bad solution either as a stop gap. Obviously this only works if all employers offered pension plans. That’s clearly not the case today.
It’s sad that lump sum distributions are even debated at all: If we take any lesson from the Lump Sum distribution option of the 401K, it’s that it doesn’t work. Too many younger workers take that money and use it for something other than retirement. This is usually to ease the pain between job jumping. I know I made that decision and several of my friends have as well. The power of the pension is that it’s shared risk and it’s mandatory participation. Shared risk means shared commitment. It’s a promise of benefits, not a pile of cash. If it becomes a conversation about a pile of cash (an easy thing to do) then it looses it’s power.
In all of this conversation, there is something that’s missing… and that’s the concept of a mandatory shared risk defined benefit plan that’s portable from it’s inception. In the current system, the conversation is about jumping from employer plan to employer plan.
What if you could mandate that employers had to contribute to each employee plan (mandatory private annuity contribution). There are lots and lots of details for this to work, but the idea of maintaining a pension that’s independent of the employer is a good thing to consider, it’s certainly as worthy a solution for portability as anything the DOL is currently considering.