The Best Retirement Plan Ever

How Public Sector Pension Plans Provide Adequate Retirement Savings in an Efficient and Sustainable Way

SOURCE: AP/Chuck Burton

Bruce Mulkey and Shonnie Lavender use bowls to save money for day-to-day expenses and long-term expenses like retirement. Only 43.2 percent of private sector workers have the benefit of employer-sponsored retirement plans.

By Christian E. Weller | July 10, 2008

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CAPAF's Christian E. Weller testifies today to the Joint Economic Committee. Read the full testimony.

A recent poll conducted by Bankrate Inc. found that only about 3 in 10 workers expect to have enough money to retire comfortably. Nearly 7 in 10 Americans have set low expectations about their retirement prospects. And one in five Americans say they are afraid they will never be able to retire.

It is not hard to see why so many Americans feel so uneasy about their future retirement prospects. Only 43.2 percent of private sector workers had an employer-sponsored retirement plan in 2006, the last year for which data are available. This is the lowest share in more than a decade, and a substantial drop from 50.0 percent in 2000, the last peak.

A growing number of workers are now saving with defined contribution retirement savings plans. This can leave workers exposed to a number of new risks because they often require employees to enroll themselves, and then to make difficult decisions about how much to save and where to direct their investments.

Declining retirement benefits also mean that wealth creation is increasingly carrying unequal tax rewards, depending on one’s earnings. Because contributions to independent retirement savings plans are tax deductible, higher-income earners tend to receive a larger tax benefit from contributing to their DC plans than lower-income ones.

These longer-term trends have been overshadowed by recent drops in financial and nonfinancial market wealth. Families have lost a lot of financial wealth due to a sharp decline in stock prices. Since the beginning of the year alone, the S&P 500 had lost 12.5 percent of its value by the end of June 2008. And the fact that homeowners were highly leveraged due to the recent mortgage boom meant that they stood to lose a lot when house prices began to fall. These adverse trends have meant that a growing number of families will have to rely solely on Social Security as source of retirement income.

Policy solutions are necessary to restore the promise of a retirement in dignity for the all working families in America. Policymakers should focus on elements of our retirement system that are working well. State and local defined benefit, or DB, pension plans stand out as an example of what works when it comes to achieving broad-based retirement income adequacy at a reasonable cost. A review of the economic evidence on state and local DB plans tells us that these pension plans have proven themselves as model retirement systems. They have a successful track record of performance in delivering adequate benefits in a sustainable and efficient manner.

If one were to design an ideal retirement plan, it would probably include the following features:

• Broad-based coverage, which covers all workers automatically.
• Secure money for retirement, with limited opportunities for leakage of retirement assets.
• Portability of benefits, which will allow workers to retain benefits if they switch jobs.
• Shared financing, with contributions from both employees and employers.
• Lifetime benefits, so that retirement income cannot be outlived.
• Spousal and disability benefits to provide protections against death or the inability to work.
• Professional management of assets.
• Low costs and fees.

The DB plans that provide retirement benefits to employees of state and local governments typically meet all of these criteria for a model retirement system. They have also been remarkably successful in providing adequate benefits to public sector retirees in a sustainable and efficient manner.

Policymakers should help strengthen existing DB plans, in the private and public sector. Against the backdrop of widespread and rising retirement income insecurity, models of strong retirement security are rare and yet desperately needed.

Read Christian Weller's full testimony to the Joint Economic Committee (CAPAF)