How to Address the Looming Retirement Security Crisis
As Gen Xers begin to enter their retirement years, we are starting to see the consequences of the late 20th century shift from defined benefit (DB) pensions to 401k-style retirement plans.
By: Hank Kim, Executive Director and Counsel, NCPERS
As Gen Xers begin to enter their retirement years, we are starting to see the consequences of the late 20th century shift from defined benefit (DB) pensions to 401k-style retirement plans. Americans' insufficient retirement savings will result in a combined $1.3 trillion burden for state and federal governments over the next 20 years, according to The Pew Charitable Trusts. With record levels of inflation, rising health care costs, and Social Security benefits that can't keep up, we are truly facing a retirement security crisis.
According to a study recently released by the Transamerica Center for Retirement Studies and Transamerica Institute, only 17% of Gen Xers feel very confident they will retire with a comfortable lifestyle.
Gen X entered the workforce as defined contribution (DC) plans were quickly becoming the norm, and they are the first generation to stare down their golden years without having had broad access to a DB pension plan. A new report from the National Institute on Retirement Security (NIRS) estimates the typical Gen X household has only $40,000 in retirement savings, and only 14% of Gen Xers are covered by a DB pension plan.
The outlook is grim as a comfortable retirement seems further and further out of reach for most Americans. And at the same time, employers are struggling with employee retention in a particularly tight labor market.
While the solution to these massive challenges will ultimately require a multifaceted approach, the long-term answer may be simple: Make pensions mainstream again.
Some might assume this solution would automatically be more costly for employers, but research shows otherwise. Defined benefit pensions provide more than twice as much benefit as 401ks at the same cost to the employer. For example, NCPERS' analysis of data shows that from 1975 to 2018, the average assets per participant in a private-sector DB plan grew from $5,634 to $184,432. During the same period, average assets per participant in DC individual accounts only grew from $6,432 to $59,186.
According to the Investment Management Institute, administrative and investment costs for DC schemes can also be more than four times higher than for DB plans. Further, DB plans reduce the overall cost of providing lifetime retirement benefits by pooling mortality and risk over a relatively large number of participants.
A 2023 report from JP Morgan Asset Management echoes these sentiments, and also highlights how a well-funded DB pension can actually enhance corporate finance. “A well-funded DB offers the most cost-efficient mechanism to finance retirement benefits for employees. Running a low risk, well-funded plan can be accretive to earnings while also reducing corporate leverage,” its authors note.
Defined benefit pensions can also support the recruitment and retention of workers, reducing cost for employers associated with high levels of turnover. Research shows that 84% of millennials in state and local governments said their pension benefit was the reason they're staying in the public sector, with 85% indicating they would stay in their public sector jobs until they retire.
Considering that voluntary employee turnover costs U.S. businesses approximately $1 trillion each year, it's hard to imagine why more businesses are not offering a pension to help attract and retain quality employees.
While some might think pensions are a relic of the past, they may be key to solving the retirement crisis that our country is facing. Research suggests this would also be popular across party lines, with a national survey indicating that 77% of Americans agree that all workers should have a pension.
Addressing Americans' lack of retirement security will be a critical issue in the coming years. Pensions and annuities offer a lifetime stream of income while providing added benefits such as lower costs for employers and increased employee retention.
So, why not make pensions mainstream again?