Recent losses in the stock market have jeopardized the pension savings of many U.S. workers, but the alternative approaches followed by other countries may provide possible solutions as well as problems of their own.
A new study by the Government Accountability Office looked at some of the key risks faced by U.S. workers in accumulating and preserving their pension benefits, the approaches used in other countries, and the risks and trade-offs they represent.
The study noted that U.S. workers face a number of risks in both accumulating and preserving pension benefits. Specifically, workers may not accumulate sufficient retirement income because they are not covered by a defined benefit or defined contribution pension plan. For example, according to national survey data, about half of the workforce was not covered by a pension plan in 2008.
Furthermore, workers covered by DC plans, in particular, risk making inadequate contributions or earning poor investment returns, while workers with traditional DB plans risk future benefit losses due to a lack of portability if they change jobs. Preretirement benefit withdrawals (leakage), high fees, and the inappropriate drawdown of benefits in retirement also introduce risks related to preserving benefits, especially for workers with DC plans.
The private pension systems of the Netherlands, Switzerland, and the United Kingdom represent alternative approaches to address these key risks, but they also pose trade-offs to consider in applying them in the U.S. Their systems offer ideas for mitigating risks in accumulating and preserving benefits, such as mandating coverage, sharing investment risk among workers and employers, restricting leakage, and using annuities to drawdown benefits. However, these approaches pose trade-offs. For example, in the Dutch and Swiss systems, sharing investment risk requires assets to be pooled and thus limits individual choice. Additionally, while annuitizing benefits at retirement can mitigate longevity risk, doing so also limits retirees' access to their assets.
Several proposals for alternative pension plan designs in the U.S. incorporate approaches to mitigate the risks faced by workers, such as incentives to increase voluntary coverage or mandating annuitization. However, these approaches also pose trade-offs and costs for workers and employers, and in some cases the federal government. In particular, important trade-offs arise with mandating coverage and contributions, guaranteeing investment returns, and annuitizing benefits. For example, mandatory approaches reduce risks but also raise concerns about the impact of higher benefit costs, particularly on small employers.
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