An employer that moves a typical 40-year-old worker into a cash-balance pension plan, from a traditional defined benefit pension plan, could cut that worker’s median monthly retirement income by about $188, to $891.[@@]
Researchers at the U.S. GovernmentAccountability Office have published that estimate in a report about cash-balance pension plans prepared at the request of Sen. Tom Harkin, D-Iowa; Rep. George Miller, D-Calif.; and Rep. Bernard Sanders, an independent from Vermont.
Employers fund traditional defined benefit plans using a contribution formula that assumes that younger workers will have time to accumulate more years of investment earnings.
Employers fund cash-balance plans, which are also defined as defined benefit plans, 1 year at a time, by providing contribution credits and interest credits for each year that a plan member works, regardless of the age of the worker.
Many employees and labor groups have argued that converting defined benefit pension plans can sharply reduce workers’ benefits.
Advocates of cash-balance plans have argued that because contributions are higher for younger workers and more easily portable, they are more fair to young, mobile workers.
But the GAO writes that because the typical cash-balance plan is cheaper for the employer than the typical defined benefit plan, the resulting benefits are usually lower even for the younger workers, unless the employer makes special efforts to compensate for the effects of the conversion.
A typical conversion will cut a typical 30-year-old worker’s expected monthly pension benefits $59 at age 68, to $750, and it will cut a typical 50-year-old worker’s monthly benefits $238 at age 68, to $1,085.
But some workers, including 27% of the 50-year-olds, will get more benefits from a cash-balance plan, and about 70% of employers make some effort to buffer older workers from the full effects of a conversion, the researchers write.
The researchers assume in their report that about 35% of workers will never qualify for a defined benefit pension plan, that 12% will die before reaching age 68, and that many of the rest of the workers will qualify for 2 or more pension plans.
The researchers note that all workers get more from the cash-balance plan than they would get if their employers simply shut down the traditional defined benefit plan without providing any kind of new defined benefit plan.
“Some sponsors of CB plans have already exited the DB system, a system that has been declining in sponsorship and participation for several decades now,” Barbara Bovbjerg, a GAO director, writes in a letter summarizing the GAO’s findings. “There is a crucial balance between protecting workers’ benefit expectations [and with imposing] unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system.”
A copy of the GAO report is on the Web at http://www.gao.gov/new.items/d0642.pdf