defined contribution plans. A recurring
theme throughout the book is the concept that pensions represent deferred
compensation and that, for employer-provided pensions to flourish (from the
demand point of view), employees must
be willing to accept them as a substitute
for current income.
When considering what actions
might revive the traditional employer-provided pension in those countries
that have experienced the greatest decline, Mackenzie’s suggestions include
reducing regulations, scaling back benefits, and modifying plan designs to
limit the financial exposure of the employer (as certain hybrids already do).
He warns, however, that policies to
revive the traditional pension should
not come at the expense of broadening
overall plan coverage.
While he provides a great deal of
relevant and timely information, Mackenzie neglects some valuable arguments
as to why defined benefit plans have lost
popularity. In the United States, for example, the influence of Wall Street on
corporate earnings made it nearly impossible for even the most secure of
employers both to maintain defined benefit plans and to serve the needs of their
owners (the shareholders). Maintaining
a pension program with unpredictable
expenses when alternatives exist simply
wasn’t a prudent strategy. Another factor is the inability of employees to look
upon alternate forms of compensation
(such as pension benefits) as wages, except when they easily can be assigned
a monetary value. This is nearly impossible with traditional defined benefit
plans. Finally, Mackenzie doesn’t give
enough credit to the introduction of the
401(k) plan, which gave U.S. employers
a key lever to use in phasing out defined
benefit plans. The ability to have employees pay for their retirements with
tax-deferred dollars, and mutual funds’
and insurance companies’ embrace of
401(k) plans, led to the demise of the
traditional pension—something that
wasn’t obvious in the early 1980s when
401(k)s entered the scene.
Mackenzie has done an excellent
job tackling a complicated subject. Although he appears to have a bias toward
maintaining and resurrecting the traditional defined benefit pension plan, he’s
realistic as to whether this is possible.
If we hope to provide employees with
secure retirements, we will need to
develop innovative programs. Such programs should be designed to increase
coverage (both in numbers of individuals and in average benefit levels),
expand financial literacy, not overburden employers (or taxpayers, in the case
of public plans), and create new invest-ment/insurance products that can deal
effectively with the risks that will challenge tomorrow’s retirees.
If a story with a satisfying ending is
what you are looking for, this book may
not fill the bill. I recommend it, however,
to anyone who is interested in understanding today’s retirement security
landscape, or who already is involved in
the debate about retirement security—
whether as a lawmaker, an academic, or
a think tank contributor.
mArK sHemtoB, a member of the
Academy’s Social Insurance Committee,
is president of Abar Pension Services
Inc. in Florham Park, n.j., and an adjunct
professor at Rutgers University in new
brunswick, n.j.
