Pension Plans Are Gone for Good

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

Earlier in the week Damon Jones responded to our May cover story with a discussion of retirement plans. Today, John Beshears, a professor of behavioral economics at Harvard, adds to that theme with an anecdote about his mother:

My mom retired as a high-school teacher in the San Francisco public-school system about two years ago. Based on her 34 years of service (many of those years part-time), she now receives a check every month from the teachers’ retirement fund. It’s a modest amount, about half what she used to receive when she was working, but it is very comforting to know that the check will continue to arrive, month after month, for the rest of her life. My mother is lucky to have worked for an employer that provides such a lifetime income guarantee, more formally known as a defined-benefit pension plan (DB plan). Most Americans are not as lucky.

In the 1960s and 1970s, many major U.S. employers provided DB plans to their employees. According to the Department of Labor, private companies ran more than 100,000 such plans in 1975, with more than 27 million workers actively participating. Over the past four decades, however, companies have killed off these plans—as of 2013, only 44,000 remain, with 15 million active participants. A confluence of factors led to the death of the pension. Companies started to find DB plans too expensive and too risky to maintain. They also found a cheaper alternative, the defined-contribution plan (DC plan).

In DC plans such as 401(k)s, it is the worker, not the employer, who is responsible for deciding how much money to save in the plan and how to invest that money. Employers still pitch in some funds to supplement workers’ own contributions, but there is no guarantee that the end result of saving and investing through the plan will produce a target level of retirement income. Unfortunately, with workers in the driver’s seat, the evidence indicates that many families have trouble building the financial foundations for a secure retirement. The Center for Retirement Research at Boston College has calculated that more than half of households are at risk of experiencing a significant drop in their standard of living when they reach retirement.

DB plans are not going to make a comeback. The new system of DC plans is inadequate in its current form, although it is steadily improving. Will it reach the point where most or even all households have a comfortable retirement? Maybe eventually, but sadly not in time for too many Americans.