Opinion By Teresa Ghilarducci
Teresa Ghilarducci, the Bernard L. and Irene Schwartz Chair of Economic Policy Analysis at the New School for Social Research, is the author of “When I’m 64: The Plot Against Pensions and the Plan to Save Them.”
What’s so wrong with state employees getting 401(k) plans instead of their pensions?
A main drawback is that more 401(k) plans would make the nation’s retirement crisis even worse. Traditional pension plans are better deals than 401(k) plans for taxpayers because they cost less, attract and retain suitable workers, and help stabilize the economy.
401(k) plans are bad deal for taxpayers. Dollar for dollar, a traditional pension plan yields more pension benefits than do 401(k) plans because 401(k) management and investment fees are three times higher. And professionals who manage money in pooled pension funds usually get higher returns than workers who manage their own 401(k) accounts. The only clear winners when pensions switch over to the 401(k) plans are brokers and bankers.
The form of pension plan influences the type of employee attracted and retained. Want an old cop to retire? Want to offer a career path to a young, earnest would-be teacher? Use a traditional plan. Risk seekers and high turnover workers tend to prefer 401(k) plans; but do taxpayers prefer those characteristics in a public employee?
Last, the unintended effect of widespread 401(k) plans is more volatility. In contrast to traditional pensions and Social Security, 401(k) plans fuel bubbles and make recessions worse. When the economy is booming, 401(k) plan asset values soar, making people spend more and work less. Not what you want in an expansion.
Worse, when the economy plummets and takes 401(k) assets with it, people do the opposite; they cling to the labor market and rein in spending – again, two things you don’t want in a recession.
At least now public sector workers can retire with a guaranteed pension, making way for other people to get jobs.
401(k) plans for public employees will hurt private workers’ chances to get better pensions and make taxpayers pay more for less.