Defined benefit pension plans have been an incredible success story, as the figures in this issue show.
The 1,000 largest defined benefit pension plans have assets totaling $3.8 trillion. The 200 largest defined benefit pension plans have assets of $3 trillion.
Those trillions of dollars are securing the pensions of millions of American workers. The stock market would have to fall by more than 20% for the average large corporate defined benefit pension plan to become even slightly underfunded. Many large public pension plans also are fully funded, or are close to being so.
But dinosaurs also were incredibly successful in their era, and they are extinct.The extinction of defined benefit plans is not inevitable, but it might take government intervention to prevent it. This is a topic the presidential candidates should address in the forthcoming campaign: How can the next administration help preserve defined benefit plans?
Defined contribution plans are excellent savings vehicles, especially for highly mobile employees, but they are not truly pension plans, although they can be used as such.
Defined benefit pension plans are far richer and far more secure than defined contribution plans for long-term and older employees. Absent the burdens of excessive government regulation they would be a far more efficient and effective way of providing retirement income for workers than defined contribution plans.
In addition, they have powerful effects on the economy. Defined benefit plans -- because they can take the long-term view, because the assets are pooled, because the liabilities are insured by the plan's assets, by the earning power of the corporation and by the Pension Benefit Guaranty Corp. -- can take more risk than defined contribution plans.
They can thus invest in such high-power, high-risk engines of the economy as venture capital, leveraged buyouts and junk bonds. They have helped to finance much of the innovation that has led to the incredible growth in the U.S. economy.
If they are allowed to become extinct, the economy will lose that engine of innovation and growth. Other sources of venture capital might be developed, perhaps even vehicles to allow participants in defined contribution plans to invest in venture capital.
But these vehicles are unlikely to provide the large amounts of long-term, patient capital committed in advance that defined benefit plans have provided.
The time has come to seek ways of reversing the decline in the number of defined benefit plans. It is too late in the Clinton administration for any meaningful progress to be made. But the candidates can begin to debate possible solutions, and the next administration should tackle the problem in the first year.
