Pension results differ for public, private sectors

We’ve read several studies and reports suggesting that public pension systems should adopt mandatory defined contribution plans or hybrid plans in part because the private sector is doing so.

Indeed, the Pension Benefit Guaranty Corp. says that the number of private-sector defined benefit plans that it insures has declined from 112,000 in 1985 to 27,500 today. Most reports on this trend, however, rarely dig into the reasons that the number of DB plans in the private sector is dwindling.

A new book, Retirement Heist, sheds some light on the industry, alleging that corporate America intentionally raided their pension plans to shelter taxes, deceive shareholders and finance executive perks.

An issue brief published in March by the National Institute on Retirement Security also is worth a read. “Who Killed the Private Sector DB Plan?” points to three distinct reasons that private-sector companies are trending away from traditional pension plans:

• Increased regulation: The brief points to changes in the law beginning in the 1980s, particularly the Retirement Equity Act (1984), Tax Reform Act (1986) and Pension Protection Act (2006), to illustrate why private-sector firms are avoiding DB plans. For instance, the Pension Protection Act significantly decreased employers’ ability to smooth assets and liabilities, which limited their ability to accurately forecast future pension contributions.
• Industry changes: NIRS argues that the decrease in manufacturing jobs and increase in technology employment in the United States has practically eliminated the notion of long-term employment with one company. That has reduced the need to offer the security of a defined benefit pension as a job retention incentive.
• Employer/employee disconnect: NIRS states that surveys show private-sector employees highly value DB plans, but their employers do not believe that they do.

The white paper makes several other interesting observations. It cites research stating that as private-sector employers have gravitated toward DC plans, they also have significantly decreased the average retirement plan contribution per employee.

The paper notes that nearly all private-sector DB plans are entirely funded by the employer, as opposed to a public pension plan such as the Ohio Public Employees Retirement System, which requires that employees pay at least 10 percent of their salary toward retirement benefits. It also makes a case for third-party sponsorship of private-sector DB plans.

At OPERS, we believe public workers deserve to choose the type of pension plan that best suits their needs. Our defined benefit plan dates back 76 years. Since 2003, we also have offered a defined contribution plan and a hybrid plan based upon the passage of legislation by the Ohio General Assembly.

All three options can provide retirement security to our members, as well as a significant economic boost to the entire state of Ohio, without our system following the trends of private sector companies.