Damon A. Silvers, associate general counsel for the AFL-CIO, Washington, is charged with overseeing organized laborís interests on corporate governance, pensions and general business law issues ó roles that Mr. Silvers pursues with relish. He has been with the AFL-CIO since 1997 and helps develop pension policy. He has represented the organization in negotiations on a variety of key issues, including those related to the Pension Protection Act of 2006. He also plays a prominent public role, appearing regularly as a witness before Congress and the Securities and Exchange Commission. His colorful quotations also frequently advance laborís cause in the press. Mr. Silvers, who has been active in labor issues since helping organize a union for Harvard University faculty members during his student days in the 1980s, has been a particularly strong advocate for defined benefit pension plans, which he says are essential to ensure that most workers can truly afford a comfortable retirement.
Why is the move away from defined benefit plans to defined contribution plans a concern of the AFL-CIO? Defined benefit plans provide workers with protection in retirement that are vital for real retirement security. Defined benefit plans provide insurance against capital market risk. They provide insurance against outliving your savings. But the most important thing is they are a structure for real employer financial contributions to employee retirement security. The typical DB plan involves employer contributions in the range of 8%-10% of payroll. DC plans involve employer contribution levels net across the workforce of typically less than 3%. The decrease in the private sector in DB plan coverage has meant the loss to working people of all these forms of security which are extremely important, the loss of affordable access to highly skilled professional money management, and most importantly, a real pay cut of something on the order of 5%.
What is your view of the success to date of Pension Protection Act? What needs to be changed and do you anticipate those changes will be made? The Pension Protection Act is a decidedly mixed bag. It has provided some important relief to some pension plans that was badly needed and was well received. The Pension Protection Act has also embodied a fundamentally mistaken conception of pension finance, which is threaded through the entire act ó and itís hard to know exactly how to change it ó which is the notion that pension plans ought to be managed as if they might need to be liquidated at any moment. Thatís simply wrong. The whole point of a DB pension plan is its ability to absorb market volatility over time. One of the worst aspects of that act, in my opinion, was the attempt to allow conflicted investment advice in DC plans. In terms of fixing all these things, Iím not sure whatís going to happen. Thereís been much talk about technical corrections bills. The retirement security crisis, we believe, is well beyond that kind of thing. Congress, in our view, needs to focus on the larger crisis of retirement security for working Americans, which is very dramatic.
So you feel new legislation is needed? Thatís our view. It needs a much more comprehensive approach, and one thatís not primarily focused on imposing financial burdens on existing pension funds but is focused on the fact that too few Americans have a real pension plan and thatís going to be a big problem for our country as the baby boomers retire.
What would have to happen to generate a DB resurgence, and what are the chances that will happen? The AFL-CIO Executive Council issued a statement about this last summer. We focused on a couple of points. One, it is difficult for employers who wish to provide retirement security to their employees to do so if they operate in competitive environments where other employers are completely shirking their responsibilities. So, there has to be universality. There also needs to be portability. The labor movement has a long history of providing portable DB plans. It shows thereís no contradiction between the notion of defined benefit and the notion of portability. In a way, the labor movementís message on retirement security is that it is not possible to achieve retirement security for most Americans without spending real money. Employers need to spend real money.
Organized labor is said to be working on a hybrid DB/DC model. How would that work? Whatís the status? What has to happen to make this a reality and what are the chances that will happen? The press has attributed to us that weíre working on a, quote, hybrid. I donít think weíve actually said that. What the AFL-CIO has said is that we need a model for universal retirement security in the United States that has the features of defined benefit plans and that provides some portability. There are lots of options in pension plan designs. There are significant numbers of plans that have DB features and have some ability for employees to contribute voluntarily on top of that, for example.
What is your single biggest concern about DC plans? The single biggest concern about DC plans is that they are a smokescreen for defunding retirement security. And the structure of the DC plans in this country is wildly tilted toward the more affluent. A huge portion of the tax subsidy that is being given to DC plans is going to the top 10% of the population in income. And the numbers in terms of DC plan balances are terrifying. The average numbers look decent. They are over $100,000. But thatís because a handful of people have lots of money and everybody else has very little. When you look at the median numbers, they are terrible. The median number for the working population in the private sector as a whole is around $30,000 for plan balance. The median number for the balance in all retirement accounts together for families whose wage earners are in their 50s is around $60,000. This is simply not enough money to live for a year and a half, let alone enough money to live for 30 years.
If DC plans really do represent the future for the retirement industry, how can they be improved to better benefit plan participants? The features of DB plans that make DB plans a real way in which to ensure the retirement security for working Americans Ö can be pasted on to a DC plan. But at a certain point you no longer have a DC plan. But the place to start is more money.
What are AFL-CIOís most important legislative and regulatory priorities involving pension and retirement plans? Our most important priority is retirement security for all Americans. We donít have that now; in fact weíre losing that every day. Investor protection, particularly around these alternative asset classes, has been a focus of ours, as hedge funds and private equity funds have gone public; ensuring that we reverse this bias that seeks to strangle pension funds in the name of saving them by treating them as though they should be ready to liquidate at any moment. Bankruptcy: Ending the practice of using the bankruptcy system as a means for stripping working Americans of their pensions and retiree health care in order to create giant payoffs for executives and enrich banks.