Senate HELPS Committee asks, “What Can We Do to Expand Defined Benefit Pension Plans for Workers?”

March 8, 2024

FYI Week of March 8

The U.S. Senate Health, Education, Labor, and Pensions (HELP) Committee held a hearing on February 28 that examined the retirement crisis in America and the potential expansion of the defined benefit (DB) plan as a solution. Executive director of the National Institute on Retirement Security (NIRS) Dan Doonan was one of five witnesses and told the Committee the move away from the DB pension model is a “major culprit” in the nation’s retirement crisis and serious policy discussions about rebuilding retirement security for the nation must include increasing pension coverage as part of the solution.

The hearing – entitled “Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers?” – heard testimony from Doonan and four other witnesses:

Teresa Ghilarducci, the Irene and Bernard L Schwartz Professor of Economics and Policy Analysis at The New School for Social Research
Rachel Greszler, Senior Research Fellow at The Heritage Foundation
Sara Schambers, UAW Member, Local 182, Ford Livonia Transmission
Eric Stevenson, President of Nationwide Retirement Solutions

Senators Bernie Sanders (I-VT), Chair of the HELP Committee, and Bill Cassidy (R-LA), the Committee’s ranking member, conducted the hearing. Sanders noted at the outset that “[t]he truth is that we now have a retirement crisis in America that demands our immediate attention.” He proposed that every corporation in America should be required to provide a retirement plan, and if they do not, then individuals should be given the opportunity to participate in a program that is equivalent to the plans that members of Congress receive – the Federal Employees Retirement System (FERS).

[FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). For members of Congress or congressional employees with at least five years of service as such, their Basic Benefit at age 62 is a monthly annuity payment based on 1.7 percent of the “high-3 average salary” — which is the highest average basic pay earned during any three consecutive years of service — multiplied by years of service as a member of Congress or congressional employee (which do not exceed 20), PLUS one percent of their high-3 average salary multiplied by years of service exceeding 20 years. The TSP is a defined contribution plan that has an employer contribution equal to one percent of basic pay per pay period. Individuals can also make their own contributions to their TSP account and will receive a matching contribution on the first five percent of pay that they invest in their TSP plan.]

Prior to the hearing, Sanders released a 21-page report, entitled “A Secure Retirement for All,” in which he provided information on the size of the retirement problem generally, the declining access to defined benefit plans, the problem of limited access to retirement plans, and potential solutions. Sanders included a number of these findings in his opening remarks, which included the following:

Nearly half of Americans 55 and older have no retirement savings.
Roughly 52 percent of Americans 65 and older are living on less than $30,000 annually, and one in four survive on less than $15,000 per year.
The average monthly Social Security benefit in 2023 was about $1,782, or $21,384 annually.
Nearly 30 percent of the workforce had a defined benefit plan in 1975; now only 13.5 percent do.
More than 27.2 million workers participated in defined benefit plans in 1975, versus 11.2 million workers participating in defined contribution plans.

During his opening remarks, Sanders said the U.S. has one of the highest rates of senior poverty compared to other wealthy nations, according to the Organization of Economic Cooperation and Development. He pointed out that only three percent of seniors live in poverty in Denmark, 4.4 percent in France, and 15.5 percent in the United Kingdom, but in America over 23 percent of seniors are living in poverty. “I would hope that we would agree that that is simply unacceptable and that’s got to change,” Sanders said.

Finally, Sanders argued Social Security must be expanded, not cut. He said he wanted to lift the payroll cap on the payment of Social Security taxes starting at $200,000. “You do that—tax all income—Social Security is solvent for the next 75 years, [and you can] increase benefits by $2,400 per person,” he insisted.

In his opening remarks, Cassidy, called the focus of the hearing on promoting the DB system a “bit puzzling,” noting it seems to prescribe an agenda that is “outdated and disconnected from reality.” He also said there is already a solution, pointing to passage of the SECURE 2.0 Act on a bipartisan basis to make improvements to our nation’s retirement system. “We had the option to take an approach like the one the Chair is advocating for and chose not to,” Cassidy said. “Instead, we based the solution primarily on the success of the defined contribution system,” Cassidy stressed.

Cassidy also argued that 401(k) plans worked better for today’s workforce that changes jobs more frequently. “Very few people now retire after 50 years at a company and get a gold watch,” he explained. “Most will move between employers,” he noted, and the 401(k) model “allows them to do so while maintaining their retirement fund,” Cassidy said.

Finally, Cassidy observed there are still provisions of SECURE 2.0 that have not even taken effect yet, including those to help low-income individuals. They should be given a chance to work, he said, noting that many of the statistics Sanders was quoting did not reflect the new law’s yet-to-be-felt impact.

In Doonan’s testimony, he detailed the scope of the nation’s retirement crisis; key points were as follows:

Americans face an alarming retirement savings shortfall.
The move away from pensions is a major culprit in the nation’s retirement crisis. While 401(k) plans are an important part of the retirement equation, “they just were not designed to replace pensions,” Doonan underscored.
“Conventional wisdom suggests that 401(k)s cost less, but Doonan said what that really means “is that we are putting less money into a less efficient system, as retirement costs rise, and hoping for the best.”
Today’s pension designs and management can be beneficial for employers, workers, and the economy, as they are the most economically efficient way to deliver retirement income, while also offering important workforce advantages to employers.
Pensions paid out more than $600 billion in benefits in 2020, supporting $1.3 trillion in economic activity. They are “user-friendly” for workers and face little “leakage.” [Leakage is when workers take their savings out of the tax-preferred retirement system.]
In the past, the biggest challenge for employers has been unstable costs. “But today, there are much more sophisticated tools and benefit designs that have addressed this challenge,” Doonan stressed, saying “I believe that, if companies give pensions a fresh look, they will discover that win-win solutions are possible.”

Doonan also pointed out that data show most Americans will not have enough money for a financially secure retirement. For example, NIRS’ Generation X research found that the bottom half of GenX earners have only a few thousand dollars saved for retirement, and the median household has only $40,000 in retirement savings. Also, retirement savings for GenX are highly concentrated among the highest earners.

The NIRS chief also noted there is a growing range of pension plan benefit designs focused on risk management. “Many assume that all pension plans have similar benefit designs,” Doonan observed, but “[n]othing could be further from reality, he said. Doonan called Committee members’ attention to the Wisconsin Retirement System (WRS) and the South Dakota Retirement System (SDRS), two public pension plans “that deliver stable costs for employers while providing reliable benefits for members. His written comments provided a chart showing what Doonan described as “the remarkable cost stability of these systems throughout volatile times.”

Finally, Doonan’s testimony pointed out “the ground is shifting with respect to employers offering pensions.” Specifically, he highlighted the UAW’s negotiations with the “Big Three” automakers last year that called for a restoration of pension benefits. “While only increases to 401(k)s were part of the final deal, the UAW has signaled it will continue to advocate for pensions,” he said, pointing to the UAW witness’s earlier testimony. He also stressed IBM’s recent announcement that it would reopen its pension plan and end its 401(k) matching contributions, which produces substantial cash savings for IBM, he said.

Doonan concluded his written testimony by stating if Congress is serious about rebuilding retirement security for Americans, “increasing pension coverage must be part of the solution.” He said, “[p]ensions not only provide reliable lifetime income for employees, they are economically efficient, they provide workforce benefits to employers, and they provide substantial economic impacts to communities across the nation, especially rural areas.”

Coverage of the HELP hearing by Brian Anderson, 401k Specialist Editor-in-Chief, provides summaries of the high points in the testimony of the other four hearing witnesses:

1. Sara Schambers, UAW Member: The first witness, United Auto Workers member Sara Schambers discussed how, despite winning some major victories in UAW’s recent six-week strike, they still fell short of restoring pensions. She said that even though automakers are expected to fight restoring the traditional pension in the next round of union contract negotiations, UAW’s goal of restoring pensions will again play a big role. “Our next ‘big three’ contracts expire in 2028, and we are ready to fight like hell for retirement security, for pensions and healthcare when I retire,” Schambers said.

2. Teresa Ghilarducci, a professor at the New School for Social Research: Ghilarducci warned of the differences between averages and medians, noting that “You might hear about the average retirement wealth being quite high and actually growing, but for the typical American, the median retirement wealth “has gone down for the bottom 90 percent because averages don’t tell the story—distribution does.” She said her research finds it is only the top 10 percent who over the last 30 years have had a rapid increase in their retirement wealth, “even though Congress has given lots of tax breaks for retirement savings,” Ghilarducci said.

She called state-based IRA programs “baby steps” for providing more access to IRAs, but also called them out for permitting leakage and not pooling assets, adding that accounts in such programs are really serving as emergency savings accounts instead of retirement accounts because the funds can be accessed early and for reasons other than retirement, Anderson reports.

Ghilarducci supports the Retirement Savings for Americans Act (RSAA) of 2023, introduced by Senators Hickenlooper (D-CO) and Tillis (R-NC), Congresswoman Terri Sewell (D-AL) and Congressman Lloyd Smucker (R-PA). It would create plans similar to the TSP for lower-income private sector workers, establishing a new program that gives eligible workers access to portable, tax-advantaged retirement savings accounts where the federal government could match contributions for low- and middle-income workers, with the match beginning to phase out at median income.

3. Rachel Greszler, Senior Research Fellow at The Heritage Foundation: Greszler defended DC plans, disputing the findings of Ghilarducci when it comes to the current state of Americans’ retirement security, saying the lowest earners have the highest income replacement rates in retirement. She cited research showing that households in the bottom 20 percent average 123 percent of their pre-retirement incomes whereas households at the top average 75 percent.

Greszler also said older Americans report greater financial well-being than any other age group, asserting that “[a]s retirement savings have shifted from defined benefit to defined contribution plans, assets have surged,” and that “[a]t $41.5 trillion, Americans’ inflation-adjusted retirement assets have increased 330% over the last 35 years.”

While Greszler said both DB and DC plans can provide a secure retirement, she also warned, “when not managed properly, defined benefit plans can end up like Ponzi schemes.” She also supported the privatization of Social Security, arguing that money contributed to Social Security via payroll taxes would be far better off in a personal account, claiming that her analysis shows that if the younger worker today were allowed to put their Social Security taxes into a personal account, “they would have three times as much in retirement after purchasing an annuity.”

4. Eric Stevenson, President of Nationwide Retirement Solutions: The final witness to testify, Stevensen pointed out that while retirement security is always a relevant topic, “it is particularly important today as more American workers will turn 65 in 2024 than at any point in history.”

His testimony highlighted how many of today’s retirees are facing retirement without guaranteed lifetime income or a game plan for decumulating the savings they built over the course of their careers. He encouraged the use of protected retirement income solutions, which he said replicated the income security of DB plans within a DC setting by making in-plan guarantees more available within DC plans.

“Encouraging plan sponsors to offer at least one protective retirement income solution in their plans will go a long way in making sure that people have guaranteed income when they retire,” Stevenson said.

NCTR is encouraged that a full hearing in Congress has been devoted to the importance of the DB pension model as the key to true retirement security, with supplemental savings as a key component of the overall equation. One answer to the question, “What Can We Do to Expand Defined Benefit Pension Plans for Workers?” is to preserve and strengthen public sector DB plans!