Public Policy Link

PENSION PLANS

The debate over private pensions took a new and controversial turn on Dec. 10, when the Bush Administration issued proposed rules that, if adopted, would open the gates to a proliferation of so-called cash-balance plans, which had been denied tax-exempt approval pending investigation of age-discrimination claims. In recent years, much of the discussion about private pensions has focused on the relative merits of traditional defined-benefit plans and defined-contribution plans, such as 401(k)s. But a third type of plan has emerged in recent years, and these cash-balance plans are now generating controversy. Below is a look at the differences among these three types of plans and details about the administration's proposal:

• Defined-benefit plans accrue value over the years and pay set benefits when employees retire. These plans are especially valuable for long-term workers who remain at one place of employment for many years, because the value of the plan increases most late in a worker's career, when the salary is the highest.
• Defined-contribution plans provide workers not fixed benefits to be received at a future time, but a set amount that the employer contributes to a personal retirement account to be invested in stocks and bonds. Some workers supplement these amounts with additional contributions of their own.
• In cash-balance plans, employers set aside a percentage of an employee's salary and guarantee a steady interest-rate return on the contributions. Unlike 401(k) plans, employees with cash-balance accounts are not responsible for making risky investment decisions. The "accounts" are not held by individual workers but are actually pooled and managed by the company. Also, unlike traditional plans, the benefits in cash-balance plans are somewhat portable. Workers who are laid off or move to a new job every few years, a common pattern in today's job market, can take what they have accumulated at one company and build on it over time. Earning a substantial pension does not require employees to stick around at one job for decades to reap the benefits of cash-balance plans.

The controversy is that some companies that have converted to cash-balance plans in recent years have been sued for age discrimination, because employees' pension benefits have been calculated in a way that greatly diminishes what they would have received before the change, with long-term employees most affected. For this reason, the Internal Revenue Service halted approving the tax-exempt status of such plans while it investigated the discrimination complaints. On Dec. 10, the Bush Administration proposed rules that, if adopted, would open the gates to a proliferation of cash-balance plans. ASA Connection readers wishing to learn more about cash-balance plans and this controversy can tap these two sources:

1. "Administration Proposes Rules That Can Alter Pension Plans," New York Times, December 9, 2002, 12:00 a.m.
2. "Cash Balance Plans Improve Retirement Security for Today's Workers?" is an issue brief from the Urban Institute accessible at www.urban.org/retirement. It is from the Brief Series, No. 14, November 2002.

More about this issue will appear in Robert A. Rosenblatt's "Potomac Sources" column in the January-February 2003 of Aging Today.

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