Not only are pensions being offered less, existing pensions are being transferred to insurers, with employees suffering consequences
New reporting showing companies’ scrapping of pension plans has gone into overdrive means that Social Security must be expanded, an advocacy group said Wednesday.
“Expanding Social Security is important for today’s retirees,” Social Security Works said in a tweet, “but even more important for tomorrow’s.
The shift from traditional pensions to 401(k) or similar retirement plans—a change panned as an inequality-fueling disaster—isn’t new. “But lately,” reported Axios, “those changes are happening even faster.”
The outlet attributed the development to a “perfect storm of circumstances, from lower interest rates to higher longevity rates,” which “is prompting corporations to offload their pension plans—by selling them to insurance companies and offering lump-sum payments to some workers.”
This offloading is known as a “pension risk transfer” (PRT).
As Reuters reported in May,
Pension risk transfers are a lucrative business for life insurers and others involved with the transactions.
The deals have been around since at least the 1920s, but rising interest rates and stock market gains in recent years have helped to make them more common. That allows companies looking to purge their pension liabilities to more easily meet the requirement of fully funding their plans before selling them.
Insurers taking over a plan typically write a group annuity contract to cover those pensions, which generates payments to the retirees. Insurers are essentially betting that they will make more in investments than they pay out in pensions.
This PRT business “was the biggest ever in 2018,” according to Axios. And a surge was expected, with Bloomberg Law reporting in December: “Pension Buyouts Likely to Be Bolder, if Not Bigger, in 2019.”
Axios reported on evidence of the trend.
Among Fortune 500 companies, only 81 sponsored a pension plan in 2017, down from 288 in 1998, according to Prudential.
At the same time, the number of pension risk transfer deals rose to 493 in 2018 from 203 in 2012, according to the LIMRA Secure Retirement Institute, a nonpartisan research center.
As Social Security Works noted in its tweet, the new reporting included a graphic showing a particularly bleak pension outlook for those aged 35 and under:
Only 14% of households under age 35 have access to a pension plan: https://t.co/OsvsBWsdt6
Expanding Social Security is important for today’s retirees – but even more important for tomorrow’s.
— SocialSecurityWorks (@SSWorks) August 7, 2019
Whether they’re unable to have any retirement plan, are forced to relying on a 401(k) or IRA, or have a pension that gets transferred, workers will likely be shortchanged. They would have no safeguard under the federal Pension Benefit Guaranty Corporation (PBGC), and while a lump sum option may seem attractive, it may not be an economically-wise move.
A 2017 study by MetLife found that one in five retirees who took lump sums spent them down within five and a half years, and nearly a third regretted using large chunks of the money for short-term needs like home improvements.”
“Often retirees think that if they exchange their pension for a huge chunk of money— sometimes as large as $300,000 or even $400,000—they can do a better job investing it themselves in the stock market,” Karen Friedman, executive vice president and policy director of the Pension Rights Center, told AARP earlier this year. “But economists warn that rarely, if ever, can people replicate the security of a pension.”
In March, the Trump administration’s Treasury Department said it would not impose a rule banning lump sums to people already retired. From CNN:
You’re taking a group of people who are retirees who are already living their lives on a pension, and you are saying to them, ‘here, instead of the pension, why don’t you take this big check,’ and they don’t bother to tell them that this big check is worth less than your pension,” [former PBGC director Josh] Gotbaum said. “And that’s what Treasury said you can go back and do.”
“The 401(k) revolution has been a disaster,” said report co-author Monique Morrissey, “yet some policymakers are calling for cuts to Social Security, which will be the only significant source of retirement income for most Americans—if they are able to retire in the first place.”
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