Researchers Say Typical Pension Shifts Hit Benefits

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.