Americans love pensions. Where did they go? Will they ever return?
A new survey suggests most Americans think a traditional pension is better than a modern 401(k) plan for achieving a secure retirement.
That finding invites a question: Why don’t more Americans have pensions?
Over the past half-century, the 401(k) and IRA have gradually supplanted the pension as tools for most Americans to save for retirement.
Between 1975 and 2019, the number of people actively participating in private-sector pension plans dwindled from 27 million to fewer than 13 million, according to a congressional report. Modern pensions are largely confined to the public sector, where unions have helped keep them alive.
But that doesn’t mean pensions aren’t popular.
Most Americans equate the pension with the American Dream
In a recent survey by the nonprofit National Institute on Retirement Security, more than three-quarters of respondents agreed with the statement, “The disappearance of traditional pensions has made it harder for workers to achieve the American Dream.”
More than two-thirds of those surveyed opined that pensions do more than 401(k)s to “help workers achieve a secure retirement.”
The survey, conducted in October 2023 by Greenwald Research, covered a demographically balanced sample of 1,208 adults.
The finding is unusual, if only because of how seldom surveys ask Americans about pensions.
“It’s been kind of a moot point in the private sector,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute.
The survey, published in February, comes from a nonpartisan think tank whose leaders “think pensions serve workers very well,” said Dan Doonan, the group’s executive director.
Traditional pensions typically offer a guaranteed monthly benefit to retirees, a steady stream of checks that continues until death.
The 401(k), by contrast, offers a way for employees to build their own retirement savings, often with help from the employer. Upon retirement, the retiree largely decides how quickly or slowly to spend the money down.
For the modern job-seeker, the pension has nostalgic appeal
To modern job-seekers, the pension has a nostalgic appeal. Many consider it the gold standard of retirement benefits.
“When you’re asked, ‘Do you like a pension?’ Yes, of course I do. It’s kind of like asking, ‘Do you like ice cream?’” said Anqi Chen, a senior economist and retirement researcher at Boston College.
With traditional pensions, employers bear most of the risks that come with promising workers a steady stream of income, often decades in the future.
“You’re promising these benefits 30, 40 years before you have to pay them out,” Chen said. “How is the market going to play out over 30, 40 years?”
Another imponderable: How long is the retiree going to live?
Over the years, private companies gradually shifted from pensions to 401(k)s, which are generally cheaper and entail far fewer risks for the company. Indeed, the 401(k) transfers most of the risk to the worker.
“The beauty of traditional pensions is that I work, I don’t really have to deal with any investment returns . . . and then I retire, and I get essentially a retirement paycheck on top of my Social Security,” said David John, a senior strategic policy advisor at the AARP Public Policy Institute.
With a 401(k), he said, “you have to make a decision at the end of your working life: ‘What am I going to do with this money?’ And that is a complex and confusing decision that one has to make. It’s scary.”
Though popular, pensions are far from perfect
But pensions are far from perfect. And, according to experts, the golden age of pensions is more myth than fact.
Pension participation peaked at around two-fifths of the private workforce in the 1970s, according to Andrew Biggs, a senior fellow at the American Enterprise Institute.
“The reality is that most people never participated in a pension, and most people who participated in a pension never got a benefit,” he said.
Decades ago, private employers might require workers to log 25 or 30 years to qualify for a pension, John said.
Pensions delivered retirement security to millions of factory workers. Yet, minimum-wage employees never had real access to pensions, Copeland said.
Workers who changed jobs frequently might never qualify for a traditional pension. By contrast, workers seldom face long waits to enroll in a 401(k).
Will pensions make a comeback?
Two developments in 2023 seeded enthusiasm that the pension might be making a comeback.
Striking autoworkers made headlines by demanding the return of traditional pensions for some workers. They didn’t get the pensions back, but the bold ask illustrated their enduring appeal.
And IBM announced a return to defined benefits for U.S. workers, a plan akin to a traditional pension. Instead of contributing matching funds to employee 401(k)s, IBM would make automatic contributions to Retirement Benefit Accounts.
“It’s been difficult to have conversations about starting new pensions,” Doonan said. “But I think we’re starting to see the conversation shift a little bit.”
But IBM caught flak for its new retirement plan. Removing the 401(k) match robbed employees of an incentive to save more, critics said, and workers lost control of how to invest their retirement funds.
In any case, retirement experts do not envision many more corporations reviving the traditional pension.
“The main aversion is that they are expensive for the employer,” John said. “All of the decisions and all of the risks fall on the employer, rather than the employee. It’s expensive, and it’s complex.”
How expensive? Biggs estimates a pension might cost an employer a sum equivalent to 20% of each worker’s salary. A 401(k) match is a lot cheaper.
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“Let’s say they contribute 3% of pay to a 401(k),” he said. “They could give you a defined-benefit pension if they take away another 17% of your pay.”
And that, of course, would mean a lower salary for the worker.
“The question, to me, is not, Would you want to have a pension?” he said. “It’s, 'What are you willing to give up in order to have a pension?' Because you’re not going to get it for nothing.”