Retirement Security

Friday, October 14, 2011 | 0

California falls short of compensating many injured workers for their earnings losses.

The 2004 reforms and the failure of the Division of Workers' Compensation to revise the Permanent Disability Rating Schedule has effectively meant that uncompensated wage losses have increased.

What is often not considered is retirement security.

As many folks who are working and who have 401ks know, retirement security seems dodgy at best.

Injured workers who are unable to return to their jobs often have to cash out 401k plans just to make ends meet. That's if they even have such plans.

And for the lucky minority who have legacy-style "defined benefit plans", an injury may make a difference in the ultimate benefit or may stop a career years before the qualifying age for the pension.

So it's with interest that I noticed a study done by the University of California, Berkeley labor center. The paper, entitled "Meeting California's Retirement Security Challenge," is edited by Nari Rhee of the UC Berkeley Center for Labor Research and Education. Included are chapters by Jacob Hacker, Sylvia Allegreto, Joaad Saad-Lessler, Lauren Schmitz, Christina A. Clarke, Amal Harrati, Beth A. Almeida, Christian E. Weller, Anthony Webb, and Theresa Ghilarducci.

The paper notes that in California only slightly over half of employers offer pension plans, and the majority of those are not defined benefit plans.

As the paper notes, we have gone from a three-legged stool model (Social Security, employer sponsored pension and private savings) to a two-leg model.

Here, quoted at some length, is a summary from the paper's introduction by Jacob Hacker:

"America’s framework for providing retirement security was historically referred to as a “three- legged stool.” Social Security, private pensions, and personal savings—each “leg” was supposed to carry an important part of the weight of securing workers’ retirement. For lower-income workers, Social Security was far and away the most important leg of the stool, providing a lion’s share of retire- ment income (Frolik & Kaplan, 2010, pp. 282-3). But for middle- and higher-income workers, tax-favored private pensions were assumed to be vital for achieving a secure retirement—especially after the Employee Retirement Income Security Act of 1974 put in place rules designed to ensure that DB pension plans would be properly run, broadly distributed, and secure (Purcell & Staman, 2009)."

"The problem is that this unique employment-based system is coming undone, and in the process, risk is shifting back onto workers and their families. As recently as 25 years ago, more than 80% of large and medium-sized firms offered a DB pension; today, less than a third do, and the share continues to fall (Langbein, 2006). Companies are rapidly “freezing” their defined-benefit plans (that is, preventing new workers from joining the plan) and shifting them over to alternative forms (such as the so-called cash-balance plan) that are more like 401(k)s. For workers fortunate enough to partici- pate in an employer sponsored retirement plan, 401(k) plans have become the default vehicle for private retirement savings.

The expansion of 401(k)s has not led to an overall increase in employer sponsored retirement plan coverage. Instead, 401(k)s have largely substituted for traditional pension plans, and the share of workers offered any plan at their place of work has actually declined. In 1979, just over half of private wage and salary workers aged 18–64 who worked half-time or longer were covered by an employer sponsored retirement plan. Thirty years later, the share had fallen to less than 43% (Economic Policy Institute, 2011). For younger private workers, even college-educated workers, traditional pensions are essentially unavailable; they are lucky if they have access to a 401(k)."

"The one exception to this story is, of course, the public sector, where (defined-benefit) pensions remain the norm—almost certainly because of the much higher rates of unionization in the public sector than in the private sector (Munnell, Haverstick, & Soto, 2007, pp. 2-3). Recently, these pensions have become a source of controversy for two reasons. First, in part because of the severe downturn of 2007–2008, many states’ plans are substantially under-funded (Dalton, 2011). The scale of this shortfall is frequently overstated and funding ratios have improved with recovering stock values. But states will nonetheless have to increase contributions to plans going forward (which currently represent a little less than 4% of state expenditures) or reduce future outlays (which is difficult given union contracts) to achieve adequate funding (Lav & McNichol, 2011, pp. 3-4). It is crucial to note, however, that “state and local plans do not face an immediate liquidity crisis; most plans will be able to cover benefit pay- ments for the next 15–20 years” (Munnell, Aubry, & Quinby, 2010, p. 14)."

"The second reason for controversy is more political than economic. As private DB pensions have disappeared, the argument that the public sector should follow suit becomes increasingly powerful. Yet assessing the virtue of such a shift requires examining the shortcomings of 401(k)s and other DC plans alongside the financial problems faced by public (defined-benefit) plans.

401(k) plans are not “pensions” as that term has been traditionally understood, i.e., a fixed benefit in retirement. They are essentially private investment accounts sponsored by employers. As a result, they greatly increase the degree of risk and responsibility placed on individual workers in retirement planning."

"Traditional DB plans are generally mandatory and paid for largely by employers (in lieu of cash wages) (Frolik & Kaplan, 2010, p. 361-363). Thus, they represent a form of forced savings. Defined-benefit plans are also insured by the federal government and heavily regulated to protect participants against mismanagement (Ibid.). Perhaps most important, their fixed benefits protect workers against the risk of market downturns and the possibility of living longer than expected (so-called longevity risk) (Broadbent, Palumbo, & Woodman, 2006)."

"None of this is true of (defined-contribution) plans. Participation is voluntary, and many workers choose not to participate or contribute inadequate sums (Munnell & Sundén, 2006, pp. 2-3). Plans are not adequately regulated to protect against poor asset allocations or corporate or personal mismanagement (see Stabile, 2002). The federal government does not insure defined-compensation plans, and defined-compensation accounts provide no inherent protection against market or longevity risks (Jefferson, 2000). Indeed, some features of defined-compensation plans—namely, the ability to borrow against their assets, and the distribution of their accumulated savings as lump-sum payments that must be rolled over into new accounts when workers lose or change jobs—exacerbate the risk that workers will prematurely use retirement savings, leaving inad- equate income upon retirement. Perversely, this risk falls most heavily on younger and less highly paid workers, the very workers most in need of protection.

As defined-benefit pensions vanish, Social Security is the only guaranteed pension left for the vast majority of private sector workers. Yet the role of Social Security has declined in the last 20 years. The wealth represented by expected Social Security benefits fell in the 1980s and 1990s, due both to the maturation of the program and cutbacks that occurred in the late 1970s and early 1980s (Wolff, 2002). Looking forward, Social Security is expected to replace a smaller share of pre-retirement income than it did in the past (CBO, 2005). That is true even if Social Security pays promised benefits—an assump- tion that is safer than many believe but still hinges on favorable economic and demographic trends and some adjustments in the program (Ibid.; Sanders, 2011; AARP, 2010)."

"In essence, we have moved from the traditional three-legged stool of retirement security to a much more wobbly two-legged stool—Social Security and private savings (inside and outside of 401(k)s). Rather than enjoying the protections of pension and retiree health plans that pool risk broadly, Americans are increasingly facing these risks on their own. The greatest impact has been on the middle class, which relied much more much more heavily on defined-benefit pensions than either poor or affluent households. As private risk protections have eroded, in short, retirement savings has become at once less equal and more risky."

These trends have great consequences for injured workers in particular.

It's once more reason that California workers' comp policymakers need to keep in focus the goal of adequately compensating long term earnings losses.

The entire report by the UC Berkeley labor center is here.

<i>Julius Young is an applicants' attorney for the Boxer & Gerson law firm in Oakland. This column was reprinted with his permission from his blog, http://www.workercompzone.com</i>