Defined benefit plans are on life support. The number of such plans insured by the Pension Benefit Guaranty Corp. declined to 44,000 in 1994 (the last year for which data are available) from 114,000 in 1985.
It might take a miracle, but efforts should be made to revive them. Defined benefit plans have served the American worker well. From at least 1920 until 1985, defined benefit plans were the preferred form of pension provision.
Defined benefit plans promise employees triple-guaranteed pensions tied to earnings and years of employment. They are guaranteed first by the assets in the pension fund; second, by the financial resources of the employer; and third, by the PBGC. These guarantees are worth a great deal.
And defined benefit pensions are usually greater than can be purchased by employees from the proceeds of defined contribution plans, unless the employees have extraordinarily generous matching employer contributions, or extraordinary investment returns.
This is because combined employer-employee contributions to a defined contribution plan generally are less than the employer contribution to a defined benefit plan. Further, the average employee will invest too conservatively to reap the highest investment return.
In addition, many employees will borrow from their defined contribution plans, further reducing returns and hurting their ultimate pensions.
Defined benefit plans have fallen from favor for several reasons. First and foremost, Congress made defined benefit plans too complicated, too expensive and too unrewarding for top management.
As many warned would happen, top management lost all interest in defined benefit plans when the maximum annual benefit that could be funded by such plans was reduced to $150,000. Top management took care of itself with non-qualified plans and gave up on defined benefit plans.
Second, employees seem to favor defined contribution plans, even though they directly are bearing part of the cost. But it is possible employees would have appreciated their defined benefit plans more if as much effort had been put into educating employees about them as has been expended on defined contribution plans.
David Strauss, executive director of the PBGC., has proposed increasing the maximum pension fundable through a defined benefit plan to as much as $1 million a year, and also simplifying the rules surrounding defined benefit plans.
These are minimal first steps. More will be needed to revive defined benefit plans. At a time of budget surpluses, Congress should set aside a few billion dollars to revive such plans. It might save trillions of dollars in the long run.