A senior fellow at the Urban Institute wants to give defined benefit plan sponsors another worry and added cost.
C. Eugene Steuerle in a public policy commentary recently published by the institute contends pension plans perhaps inadvertently discriminate against groups with shorter life expectancies. Losers include those with poorer health, less education and more physically demanding jobs or racial groups with higher mortality rates Blue-collar workers might do worse than white-collar workers and blacks worse than whites.
Because pension plans often pay out benefits over a workers remaining life, he argues, annuities provide lower benefits to those with shorter lives than those with longer lives.
Short lived shouldnt mean shortchanged, he asserts.
Mr. Steuerle suggests considering some sort of an offsetting mechanism to provide higher benefits for those with below-average lifetime earnings, or life insurance to supplement the pension plan for those participants at risk, or annuities guaranteed to provide at least, say, 15 years of payments to the participant or heirs.
Of course, higher benefits for lower-paid employees would cost more money unless benefits for higher-paid workers were cut at the same time. Many corporations have already dropped defined benefit plans because of their costs. A new layer of costs would simply encourage more of the remainder to drop them.
Mr. Steuerle realizes private-sector pension plans are on the decline; nevertheless he believes public sponsors could amend their plans to reduce discrimination among their own workers.
But even in the public sector it would not be easy to fairly implement this idea. Not only do public plans have their own funding problems, but also there are too many employment, demographic and mortality factors to be considered.
In addition, courts have ruled it discriminatory for pension plans to pay lower annual pensions to women than to men because women on average live longer than men. The courts said that while it may be true women on average may live longer than men, that might not be true for any particular woman.
By the same reasoning, while on average lower-income or less-educated workers might have shorter life spans than higher income or better-educated workers, one cant say that for any individual worker. Therefore, surely it would be just as discriminatory to pay lower-wage employees pensions that replace more of their pre-retirement income than those of higher-earning employees of the same age, gender and years of service.
A report last February by the Employee Benefit Research Institute found, among those between ages 65 and 75, minorities and those with lower educational levels had the lowest median rates of increases in wealth, while most new retirees are reasonably maintaining their income and assets.
The mortality issue is outside the realm of pension plans, although there are some things plan sponsors can do to mitigate a shortfall in retirement income for any participant, regardless of demographic group.
One short-term remedy would be lump-sum payment of retirement benefits, especially for those concerned about their longevity risk. Retirees whose health is at risk could receive their benefits in full. Mr. Steuerle, however, encourages annuities and promotes Social Security as a model for its progressive annuity formula, providing more benefits to lower earners.
But a better way would allow for voluntary Social Security personal accounts, as the Bush administration proposed a few years ago. Participants and their beneficiaries would own the accumulating assets in those funds, unlike the present system. The idea would maintain the annuity and progressive formula while overcoming the issue of those lower-income participants with shorter life spans being shortchanged. People at the Urban Institute ought to revive the idea. Even Mr. Steuerle in a 1999 Urban Institute published report wrote individual accounts and progressivity need not be incompatible.