The Employment-Based Pension System: Evolution or Revolution?

July 2006, Vol. 27, No. 7
Paperback, 12 pp.
PDF, 524 kb
Employee Benefit Research Institute, 2006

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Executive Summary

Pension trend conference—The Employee Benefit Research Institute (EBRI) and AARP held a day-long conference May 15, 2006, in Washington, DC, on the topic: “The Employment-Based Pension System: Evolution or Revolution?” Several speakers predicted that the evolution currently under way will lead to radical change and the ultimate demise of private-sector defined benefit pension plans.

Pension coverage—Traditional defined benefit pension plans covered 23 million individuals, about half of all private-sector workers in the United States, in 1960. But in the final years of the 20th century the trend reversed, and by 2006 the change was dramatic, with many employers either freezing or dropping their “traditional” defined benefit pension plans. About half of all American private-sector workers are still offered a retirement plan at work, but among those who are, the “defined contribution” 401(k)-type of individual-account plan is now dominant.

Key points from the conference:

o Global competition: Corporate America finds itself locked in global competition and has decided it can no longer afford, for competitive and cost reasons, to offer employees the same kind of retirement plans that many workers enjoyed in the past.

o Government pensions feeling private-sector pressure: Although traditional defined benefit pensions remain common in the public sector, federal, state, and local governments are gradually realizing that they face the same financial pressures from pension costs, and their workers are likely to experience the same trends in the years ahead as new accounting standards take hold from the Governmental Accounting Standards Board (GASB).

o 401(k)-type plans need to evolve: Employers have sponsored defined contribution plans since the early 1900s, but only with the creation and growth of the 401(k) plan in the 1980s have defined contribution plans become dominant. Many advocates see the need for design changes in 401(k) plans as the financing of retirement in America continues to evolve—especially making participation automatic rather than requiring individuals to make a positive decision to sign up.

o A fading “social compact”: The decline of traditional pensions and the rise of the 401(k) plan have left many workers wrestling with the realization that they have personal responsibility for their health and retirement planning and expenses. This shift, some said, is a move away from a long-standing “social compact” among workers, their employers, and the government. Others argued the change is the best result for most workers in a highly mobile work force, where relatively few workers stay at any one job long enough to qualify for traditional pensions.