Trends and Challenges for Work in the 21st Century
futurework - Chapter 2, Box 2.2 Changing Private Pensions
The private pension system reflects a mixture of employer efforts to influence and accommodate workers choices aboutwork and retirement.
From its start at the beginning of the century and into the 1980s, the pension system was dominated by traditional "defined benefit" arrangementspredictable monthly retirement payments based on a workers pay and years of service. Reflecting companies desire to retain workers once they acquired valuable skills, these plans are "back loaded" providing disproportionately more generous benefits to workers following "traditional" patternsspending many years with a single company and retiring at a specified timethan to workers following other paths. Defined benefit pensions also reflected the widely shared view that investment management and financial risk were better handled by companies than by workers.
Beginning in the 1980s, "defined contribution" pensions, which provide rewards more directly linked to each sepa-rate year of work, began to challenge the leading role of defined benefit pensions. These newer arrangements are more adaptable to the needs of workers who change jobs or follow varied career paths. Such pensions, which typically credit a specified fraction of pay to worker-owned accounts each year, reflect employer desire to limit longterm financial exposure as well as a shift in companies priorities away from retaining workers with eroding industrial skills to attracting new workers with up-to-the-minute technological and informational skills. Small employers in particular favor defined contribution plans to avoid the financial commitment and administrative complexities associated with a defined benefit plan.
The shift from defined benefit to defined contribution pensions also reflects a growing belief on the part of many companies and workers that workers can successfully plan, and should have responsibility, for their own benefits. In defined contribution plans, workersnot companiesoften can and must decide what part of their pay to set aside for retirement benefits. Their eventual benefits will vary accordingly. What is more, workers with defined benefit pensions can expect a monthly check in a promised amount, those with defined contribution plans typically decide for themselves how to invest their accounts and when and how fast to draw them down.
Where are pensions headed in the future? At least a few trends seem likely.
_ With technological change and skills depreciation accelerating, companies will redouble their efforts to attract workers with the latest skills. There is already rapid movement toward "cash balance" pensions and other new or "reinvented" defined benefit, defined contribution, and hybrid arrangements designed to calibrate pension rewards with recruitment priorities. As companies compete for scarce workers, pensions will evolve to accommodate increasingly diverse career paths and retirement patterns, and government reforms will also seek to support such designs. The manner in which baby boomers make their transition into retirement will substantially dictate the magnitude of changes. Longer transitions through "bridge" jobs and partial retirements will accentuate the pressure for more individualized pension arrangements.
_ Advances in information technology and financial products and services will improve worker access to financial information, lower transaction costs, and increase financial options. This will increase worker confidence in planning and managing personal finances and will encourage further shifts of pension responsibility from companies to workers.
_ If pay gaps continue to widen and worker savings choices and investment experiences diverge, there is a risk that gaps in worker pensions will grow. In addition, the continuing shift from traditional defined benefit pensions, which provide collective income security, to defined contribution and other pensionswhere security resides with each workers individual account, whatever its investment valuemay have important effects. Retirees who live long and depend on individual retirement accountsor who do not hedge the risk of outliving their money by purchasing annuity products with their Individual Retirement Account proceedsmay not be as well off as those who have traditional defined benefit pensions.