Public Pension

Topics: Pension, Cash balance plan, Investment Pages: 19 (5919 words) Published: January 5, 2013
This file was not written exclusively by me. It was written by the California Retired County Employees Association, Retirement Security Committee for edit and approval of the Executive Board. I was a member of the Executive Board (Secretary) in which I contributed to and have their permission to use.


The Damaging Effects of Taking Defined Benefit Funds Out of Play

California Retired County Employees Association
Retirement Security Committee
September 2012

CRCEA - P.O. Box 706, Merced CA 95341-0706


Private sector employers have, for the most part, terminated traditional defined benefit (DB) plans and now provide 401(k) plans. The result has been a disastrous loss of pension security nationwide. The frightening extent of this is only now becoming evident as those with 401(k) plans move into or are forced to delay moving into retirement.

Unfortunately, while the numbers vary, the insufficient retirement resources theme is consistent irrespective of the media source. As noted in our March 2012 report on loss of individual retirement security, less than one quarter of 60 to 62 year olds have sufficient resources to maintain their standard of living once retired. The Wall Street Journal, on February 19, 2011, reported that the baby boomer’s median 401(k) balance was a mere $149,000. Other sources look at the broader picture with one, for example, reporting that 75% of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts, as well as an expectation that almost half of middle class workers will be poor in retirement and living on a food budget of about $5 a day. Irrespective of the source and numbers used, the loss of retirement security trend is clear. For more information on this topic, see our March 2012 report.

In this paper we explore the long term effects to the economy that would occur if the current $3.2 trillion of state and local government DB plan funds are taken out of play. This is a radical departure from the current pension reform focus that assumes transitioning the public sector to 401(k) type structures would be an economic panacea free of any serious downside. Drawing upon research from international corporate consulting and other works, we add to the alarms they raise by concluding that absent inclusion of solutions to the issues presented, long term damage to the economy would ensue, potentially for generations to come.

This refocus identifies the economic factors that are triggered in a massive transition to 401(k) type plans, as well as the damage that would result to the economy mid and long term. This harm would occur through: (1) a loss of consumer spending; (2) a loss of investment capital, and (3) increased costs of providing pension benefits.

1. Loss of Consumer Spending
Retired workers from the private sector, who must rely on 401(k) plans, are being driven into poverty. The ever-increasing population of impoverished retirees now poses a major threat to the nation’s consumer-driven economy where personal consumption expenditures usually account for 65% to 70% of the nation’s Gross Domestic Product. This was approximately $11.1 trillion or 93% of all Disposable Personal Income nationwide in 2012. Unfortunately, in addition to having less dollars available after retiring, research shows those reliant on 401(k) dollars tend to hoard for fear that they will outlive their savings. Both factors negatively impact consumer spending.

In stark contrast, because DB plans provide a stable source of income to retirees, they consistently support the national and local economies throughout the country with jobs, incomes, tax revenue and other economic benefits. In addition, they have proved particularly valuable as a built-in stimulus helping to stabilize and...
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