The most recent issue of the Bureau of Labor Statistics’ Monthly Labor Review provides a wealth of interesting—and depressing—statistics about pension coverage in the United States. The BLS’ “visual essay” documents the decline in defined benefit pensions, which now cover 18 percent of private-sector workers, down from 35 percent in the early 1990s.
Household coverage is higher, as many married couples have at least one spouse covered under a plan. Thus, a separate household survey conducted by the Federal Reserve found that 31 percent of households were covered by a defined benefit pension in 2010, though this includes households with workers employed in the public sector as well as retirees and workers covered under plans from previous jobs who are no longer accruing benefits.1
Though many workers are now enrolled in 401(k) plans, these have proven to be a poor substitute, as the typical household approaching retirement has less than two years’ worth of income saved in these accounts. The Fed survey found that the median households aged 55–64 had an income of $55,000 and just $100,000 saved in a retirement account, if they had a retirement account at all.
The BLS overview shows that pension coverage is much higher in the public sector (78 percent) and among unionized workers (67 percent) in the private sector. In contrast, only 13 percent of non-union private-sector workers are covered. The drop in private-sector coverage reflects both a decline in unionization and a decline in coverage among both groups of workers (union and non-union), though the decline was more pronounced among non-union workers.
Traditional pensions are the most cost-effective way to provide retirement security to workers but are not an option for many small businesses because they often require employers to take on long-term liabilities. Thus, 48 percent of private-sector establishments with 500 or more workers offered a pension plan, compared to only 8 percent of establishments with 50 or fewer workers. An exception to this pattern is small businesses in unionized industries such as construction and trucking where multi-employer plans are common and pension coverage is relatively high.
Exacerbating the decline in coverage is the fact that even workers fortunate enough to participate in a defined benefit plan are increasingly likely to be in a hybrid cash balance plan that has features in common with both pensions and 401(k)s. By 2010, 36 percent of participants in private-sector defined benefit plans were enrolled in cash balance plans, and another 3 percent were in other non-traditional plans. Cash balance plans usually provide less security than traditional pensions because the value of the benefit isn’t known in advance but rather depends on the interest applied to account balances. In addition, most cash balance plans allow benefits to be taken in lump sums rather than annuities, so retirees may outlive their savings; and fewer have disability provisions.
There are a few areas of improvement, as pension plans now have shorter vesting periods and are also more likely to offer benefits to domestic partners.
1. The Fed survey found that 55 percent of households had a work-based retirement plan, and 56 percent of these had a defined benefit plan (55% x 56% = 31%).