Defined-Contribution Plans are Inadequate Substitutes for Pensions

In testimony to the Democratic National Committee’s Platform Committee, Californians for Retirement Security  called for national action to address the nation’s retirement security crisis.

The following is the complete text of the testimony:

Hello, my name is Ben Valdepena. I’ve been a custodian with the Yucaipa-Calimesa Joint Unified School District. California since 1983. Today I represent the 1.6 million teachers, firefighters, nurses, classified schools employees and other public servants who are members of Californians for Retirement Security. Thank you for allowing us the opportunity to submit testimony to the Platform Committee.

Over the last few decades, as pensions have all but disappeared for private sector workers, retirement security has been sliding further and further out of reach for many Americans. The shift toward 401(k)s has proved a failure for providing retirement security for all except the very wealthy. This trend has been particularly harmful to women, people of color, low-income workers, and young people who are already burdened with student loan debt. I encourage the DNC Platform Committee to address the retirement security crisis we face—so many working men and women will be left behind if we do nothing.

For women, the pay gap follows them into retirement. A recent report by the National Institute for Retirement Security found that women are 80 percent more likely to be in poverty in retirement than a man is. For those workers with 401(k)-style accounts, the median account balance for women was a third less than for men. That median amount for women is $24,446-not nearly enough to provide income for an entire retirement! Women also face barriers to participating in employer-sponsored retirement plans because they are more likely to work part-time or leave the workforce for caretaking duties. Often these departures from the full-time workforce exclude them from participating in the employer’s retirement plan.

Despite those bleak numbers, there is some good news. Women who work in fields like healthcare or education, where defined benefit pensions are more common, have higher incomes in retirement and lower poverty rates than other women. This is a clear call for states and cities to maintain their public pension systems. Eliminating pensions and moving to 401(k)-style defined contribution plans would only increase the number of retired women in poverty.

For low-income households, only 25 percent had any savings in a 401(k)-style plan and the median account balance is only $10,400. There are a number of reasons for this. One is access. Only 35 percent of low-income households even had access to a workplace 401(k)-style retirement plan compared to 80 percent of high-income households. When they have access to a workplace retirement plan, though, low-income workers participate at lower rates than high-income workers: 64 percent to 95 percent.

There could be several reasons for the lack of participation. One of the most obvious is a lack of disposable income. Research has shown that low-income households spend a greater proportion of their income on basic necessities such as food, housing, and clothing. When these households are barely making ends meet, they don’t have extra money to put aside for retirement. Other explanations include a lack of financial literacy and a greater propensity to cash out rather than roll over savings in a 401(k)-style plan.

For our recent graduates and those nearing graduation the retirement savings problem is two-fold. First, student loan debt payments will eat up a disproportionate share of their income.

Second, as the United States – particularly in the private sector – has moved away from providing pensions as a vehicle for retirement savings, young people are being left with inadequate and risky 401(k)-style plans as their only shot for retirement.

A recent poll conducted by the American Institute of CPAs found that 80 percent of Americans have made some kind of financial sacrifice to make student loan payments with 50 percent of Americans saying they have delayed payments into retirement accounts.

Long before student debt levels exploded, younger workers were being set up for failure with the rise of 401(k)’s. The 401(k) was created to be a tax-advantaged savings tool for wealthy corporate executives – and that is what it has been most successful at doing. A GAO report from earlier this month found that 81 percent of high-income working households had savings in a defined contribution plan, compared to only 25 percent of low-income working households.

These ubiquitous defined-contribution plans are inadequate substitutes for pensions. Unlike defined-benefit pension plans, the income from a defined-contribution plan depends on how much a person saves or whether or not their employers match their contributions.

Millennials know that saving for retirement is important, but few do so because they are faced with impossible choices. And for those who do save, many only have access to 401(k)’s, which pose a number of problems. It’s no wonder that only one in five young people feel confident they will have enough money to live comfortably after their retirement. The decrease of retirement security, along with the rising threats of high student debt, will continue to erode the economic certainty of our young people until we prioritize turning things around.

The solution will surely be complex, but the first step needs to be the serious reconsideration on whether the move away from defined benefit pensions was a good one for the overall future of the American people.

Defined-Contribution Plans are Inadequate Substitutes for Pensions