Commentary | Retirement

No Pension, No Security

See this article as it originally appeared in the New York Times

Using a carrot rather than a stick approach, traditional pensions encourage workers to retire after they reach a certain age, allowing employers to structure compensation to reflect the obsolescence of skills and potential physical and cognitive limitations associated with aging. But the advantages of defined benefit pensions appear to have been forgotten in the headlong rush to replace pensions with 401(k) plans, which shift retirement costs and risks onto workers.

Most workers look forward to retirement. Therefore, the best way to nudge workers into retirement is simply to make it affordable. Policy makers should build a retirement system that combines the cost-effectiveness and security of traditional pensions with the portability and limited employer liability of 401(k)s. (For example, see the Economic Policy Institute’s proposed plan.)

Combined with Social Security benefit cuts, the rise of 401(k)s has led to growing retirement insecurity and an increase in the labor force participation of older workers. Still, workers with only 401(k)s are better off than the nearly half of full-time workers with no retirement plan at all. The impact extends beyond older workers, their families, and younger workers waiting in the wings. Our inefficient retirement system is a drag on productivity, creates managerial headaches, and, as retirement decisions are increasingly linked to stock market fluctuations, has a destabilizing effect on the economy.

Once adequacy and security have been achieved, it is easy to tweak pay and benefits — such as early retirement incentives — to meet specific labor force needs. In addition, ensuring affordable health care for older Americans should be a priority, since this is a factor in retirement decisions. The Affordable Care Act, which will cap insurance premiums for older people at three times that of younger workers, moves in the right direction. Proposed Medicare vouchers, on the other hand, would only make matters worse.

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