Protect defined-benefit pension plans
It’s no surprise that Mayor Sylvester Turner has identified maintaining defined benefit pensions as a priority for his administration. Despite all the fear-mongering from anti-pension advocates, pensions remain the best way to provide a secure retirement for workers. Pensions are also cost-effective for taxpayers and provide an enormous economic benefit to our cities and states.
As many hard-working people across the country know, individual 401(k) accounts were decimated during the recession and many lost their hard-earned retirement savings after the crash — pushing them to work longer than originally planned and hurting their stability in retirement. In the first two quarters of 2008 alone, 401(k)s and IRAs lost about $2.4 trillion.
Decades ago, more Americans had access to pensions: professionally managed, group plans designed to weather dramatic downturns in the stock market. During the last financial crisis, pensions took a hit, to the tune of $849 billion collectively. Now, almost 10 years later, many have recovered and are nearing healthy or full funding status. Funding levels averaged 74 percent in 2015, according to the Center for Retirement Research at Boston College.
Pensions are the most costeffective way to provide retirement security to firefighters, police officers, nurses, teachers and other public employees. A study from the National Institute on Retirement Security (NIRS) found pension plans provide the same level of retirement benefit at a 48 percent lower cost than 401(k)-style plans. West Virginia learned this after closing its teacher pension system and replacing it with 401(k)s in 1997. In 2003, the state studied the issue and found offering a pension plan cost the state half as much as the 401(k)s, so two years later the state moved its teachers back to a pension system. We need not re-learn this lesson here in Texas.
For workers, pensions have multiple advantages over 401(k)s. First, pensions are pooled accounts that share market risk among employers and employees. As we saw with the Great Recession, pension funds on average have recovered, where 401(k)s have been slower to do so.
Second, pension funds are professionally managed while 401(k)s rely on individuals to wade through hundreds of complex financial instruments to determine how to meet their needs in retirement. Professionally managed pension funds are better equipped to recover losses over time.
Lastly, 401(k)s have costly administrative fees that go into the pockets of Wall Street executives instead of the pockets of the hard-working people making the investment. And experience teaches us that workers simply cannot save what they need to retire with dignity through a 401(k) retirement plan. In Texas, the average 401(k) account balance is only $32,072 — a mere fraction of what is needed for a secure retirement.
Retirees are not the only ones who benefit from the security of a pension: We all do. NIRS estimates that pension beneficiaries pump $22 billion of economic activity into Texas, supporting upwards of 142,000 jobs. The financial health of our communities depends on people of all ages being able to support themselves and fully participate in our economy. Pensions allow our firefighters, police officers, teachers, and public employees to do just that.
Pensions allow us to share risk among employers and employees, the funds are professionally managed, and no individual is left alone to face an uncertain financial future in the aftermath of another Great Recession. Pensions allow Houstonians and other Texans to retire with dignity while supporting our economy. This is a retirement model we should preserve and protect.