Thoughts on Pension Plans

A couple generations ago Economists who didn't know what they didn't know sold both business and government on the idea they could give employees pension plans that would guarantee the employee's a certain return in retirement.  It was called a defined benefit plan.  Congress build in preferences for defined benefit plan into the tax code and it became the norm for Government and large businesses.

Recent history has demonstrated that defined benefit pension plans are prone to disaster.  They require an element of predicting the future based on scores of assumptions, and unless rigorously controlled the assumptions often tend to err on the side of overestimating the future.  They also require a level of discipline those who oversee plans often lack.   In the private sector companies don't contribute when they stock market is bullish, on the assumption increasing stock values will cover the cost of the program, then when the market crashes the program is hugely underfunded, or when the business founders the employee's pension get wiped out in bankruptcy.  Governments make promises to employee's that become impossible to keep when tax revenues fall.

In the private sector we now have a hundreds of thousands of older folks who are trying to figure out how to make due on far less than they expected in retirement after their companies ran through bankruptcy to reduce their pension obligations.

In the public sector we have the services provided by government disappearing under a crush of overly optomistic pension obligations.

Defined benefit plans are inherently unreliable over the long term.  The tax code should require any defined benefit plan to be based on conservative projections and fully funded each year without regard to investment performance.