The corporate world figured-out long ago that pension plans are untenable. It's simply not realistic to make promises 30-50+ years into the future. 'course, they didn't completely figure that out on their own. The Pension Benefit Guaranty Corporation was set up to guarantee pension promises made by corporations after a bit of a pension crisis in the 1970s. Companies which have pension plans must pay insurance premiums to the PBGC. The PBGC in turn pays pensions for bankrupt companies. That forced insurance premium payment was likely the tipping point. Why pay an extra tax on employee benefits when there are many ways to attract and retain talented employees? Anyone who thinks pensions are a great idea should look at the PBGC's finances. As of fiscal year 2010, they have $102.5 billion in obligations versus $79.5 billion in assets. 'course, it's possible that investment returns will make up the gap, but, if not, the US Taxpayer will likely be on the hook to make up the difference, as was the case with Freddie Mac and Fannie Mae.
The New York Times is currently running a "debate" on the Pension/401(k) issue. I'm amazed at some of the "arguments." Teresa Ghilarducci argues that 401(k) plans are bad for employees since
...401(k) management and investment fees are three times higher. And professionals who manage money in pooled pension funds usually get higher returns than workers who manage their own 401(k) accounts.But, this is side-stepping the main issue which is defined-benefit versus defined-contribution. If governments and employees are concerned about this issue that Ghilarducci raises, then the government can simply continue it's pension management, re-branded as a 401(k) plan. This would eliminate fee/return issues while eliminating the defined-benefit aspect.
Ghilarducci also claims that pensions are better for managing talent:
Want an old cop to retire? Want to offer a career path to a young, earnest would-be teacher? Use a traditional plan. Risk seekers and high turnover workers tend to prefer 401(k) plans; but do taxpayers prefer those characteristics in a public employee?If the old cop can't do his/her job any more, he should be demoted or fired---(s)he shouldn't be given a boat-load of taxpayer money. Use that extra money to pay top-dollar for the best new teachers so they don't all go to private schools.
Finally, Ghilarducci claims that "...401(k) plans fuel bubbles and make recessions worse." If anything, history seems to invalidate her claim. The Early 2000s recession was one of the mildest ever and the so-called Great Recession was barely worse than the Early 1980s recession and downright gentle compared to just about every recession before 1948. For easy to compare length, unemployment and GDP drop numbers, see Wikipedia's list of Free Banking to Great Depression and Great Depression onwards era recessions. Furthermore, 401(k) plans and pension plans invest in similar pools of equities and bonds and pensions tend to make (much) larger investment moves whereas many people barely touch their 401(k) plans.
A final flaw in Ghilarducci's logic is the assumption that a retirement opens the door for others:
At least now public sector workers can retire with a guaranteed pension, making way for other people to get jobs.While this might be true in a very narrow sense, economies don't work like this. More jobs create more spending which, in turn, create more jobs. In fact, letting people retire earlier than they could on a defined-contribution plan just makes things worse for the new worker since he or the taxpayers will have to help pay for the retiring-too-early worker in the form of lower salary/benefits (for the new worker) or higher taxes (for the taxpayers).
Currently, many government pension plans are strikingly similar to ponzi schemes---retirees take out more than they effectively put in (considering government contributions plus investment returns). Now that baby-boomers are retiring and taking advantage of these generous pension terms, governments are finding it difficult to balance the books. It's only a matter of time before something has to bend.
Update (3/2/11): See David Leonhardt's Union Contracts, Not Pay, Are States’ Problem article for a good discussion of the real problems with public workers' contracts.