The Big Picture on Progressives and Pensions

A defined benefit pension system, like any retirement system, only works if there’s enough money in it to fund what needs to be paid out. Seems straightforward, right?
Alas, not if you’re a progressive. That’s why they simultaneously push ideas like these, via a recently recycled Pat Crowley post at RI Future

  • 87% believe all workers should have a pension so they can be self-reliant in retirement.
  • 79% of Americans think it is a good idea for government to sponsor pension plans that small employers or individuals can join.
…that suggest the goal should be to get to a place where “all” people are going to be in a pension system, with a large part of the system “government sponsored”. But if everyone is in a defined-benefit plan, then where will the money come from, when there’s not enough money to simultaneously meet current obligations, while keeping enough in the kitty to pay for future obligations — as is the case in many state pension funds (including Rhode Island’s) right now? Or what will happen to pension benefits promised by companies that go out of business, without adequate resources in their funds to cover their future obligations?
DB proponents offer two basic categories of answer to these questions…
  1. Answer #1: What problem are you talking about — pensions are always secure because as much money as is necessary can be taken at will from future taxpayers to pay for them. (DB proponents don’t actually say this, it’s just implied). To get a rough idea of what this future would look like, imagine having Social Security as your only retirement, and probable continuing increases on your FICA payroll taxes throughout your lifetime in order to pay for it.
  2. Answer #2: Trust us, you can be sure that government will put aside the money it needs to pay for future obligations, even though it hasn’t managed to so far. Note, however, that amongst Rhode Island DB supporters, there are several who do not believe that providing the funding that pension plans need to meet their future obligations should be a budget priority (see Answer #1 on how they plan to make up the difference.)
But as we’ve discussed in some detail here at Anchor Rising, DB pension systems that are properly funded and managed over their lifetimes are virtually identical, from a fiscal perspective, to defined contribution systems that are properly funded and managed over their lifetimes , i.e. you get the same amount out relative to what you put in.
In the end, DB advocates, who also argue the adequate funding and reasonable benefit levels can be assumed, aren’t arguing for a system that’s fiscally different from a 401(k)-style defined contribution system, they’re arguing the government needs to take a certain portion of everyone’s paycheck, because it can plan for everyone’s retirement better than they can themselves (especially, I learned this week, in the case of people who belong to certain demographic groups whom they’ve concluded are unable to make the investment decisions that improve their chances for a maximal return, but I wouldn’t dare touch that point, except to note that Judge Sonia Sotomayor might also agree that there are “inherent physiological differences” that might make one group “wiser” than another when it comes to decision-making, but that’s her stated position, not mine, and I’m getting way off-track now…)

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