The State of Private Pensions

Friday, May 27, 2011

In March 2011, the US government’s General Accountability Office (GAO) released a report on the status of US private pension plans. Under the title, “Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits”, the GAO reviewed the state of both private Defined Contribution (DC) and Defined Benefit (DB) plans. Not surprisingly, the report stated that over 90% of the new plans formed were DC plans, creation of DB plans were primarily associated with professional level organizations, and the impact of the current financial crisis on retirement savings is largely unknown. The report was initiated at the request of US House Representatives Sander M. Levin, Richard E. Neal, and Charles B. Rangel, all members of the House Ways and Means committee.

In the opening paragraph of the report’s cover letter back to the three Representatives, the GAO reports that private pension plans account for a tax revenue loss of $105 billion for FY 2011 and an estimated loss of $602 billion for FY’s 2012 through 2014. The cover letter goes on to report that tax favored private pension plans have peaked at approximately 50% of eligible employers. This peak has occurred in the face of numerous legislative attempts to make it more attractive for employers of low income workers to implement tax favored plans and for low income workers to save. Furthermore, the cover letter raised the concern that much of the benefits of some tax favored plans are being garnered by highly compensated employees (HCE) and not lower income workers.

The stated purpose of the GAO’s review, other than at the request of the three representatives, was to:

• Identify the trend in private pension plan in recent years.

• Identify the “characteristics” of DC plan participants “at or above the” statutory limits.

• The potential impact on “low income” workers of savings’ incentives.

• The long term impact on the recent economic crisis on savers.

In general, human resources management is one of the most legislated activities with regulations occurring from the municipality to the Federal level. Specifically, regulations associated with private pensions have seen decades of legislative enactment activity; the most notable was the passage of the Employee Retirement Income Security Act of 1974 (ERISA). The stated and unstated goal of all of this action was to encourage employers to establish and maintain private tax favored DC and DB plans for the benefit of the employer’s workforce. The desired outcome is that retired workers would have access to the required financial resources during retirement.

I am always concerned when our leaders seek to improve our lives. Granted, as a nation, Americans are not the best savers, rather we are consumers. We are also facing long term and tough decisions concerning our national debt and the continued funding of entitlement programs such as Social Security, Medicare, and Medicaid. Congressionally requested studies with titles such as “Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits” make me uneasy. The same legislative acts and regulations which permitted the deployment of DC plans have allowed some employers to freeze, cut-back, and terminate cohort DB plans.  It will be interesting to see what, if any, actions are taken in the coming months with regards to new proposed private pension legislation.