Pensions Need to Evolve with the Times

This letter appeared in The Financial Times on May 13, 2002.

Sir, New York University economist Edward Wolff argues ("Pension plans come under attack", Global Investor, May 7) that the shift from traditional defined benefit (DB) pensions to individually controlled defined contribution (DC) accounts has left today's Americans substantially less prepared for retirement than those of 1983. The implication is that traditional pensions should be retained and that Social Security should not incorporate personal retirement accounts.

But Wolff's conclusions are suspect. His methodology compares DB pension wealth accumulated over a worker's entire career, including future years, with DC assets accumulated to date, systematically skewing the results.

Wolff also finds declines in "Social Security wealth" inexplicable, given that today's retirees receive higher benefits and collect for more years than retirees in 1983.

He also claims that "almost all the people who had gains were at the very top of the wealth distribution". Perhaps, but those at the top were the very people who had DC pension savings.

If all workers had pension accounts — perhaps through Social Security reform — Wolff's findings might no longer hold.

Finally, he fails to show that today's workers would have been better off with traditional DB pensions. Today's workforce is more mobile than 1983's and, while individuals with DB pensions must work several years to "vest" their benefits, DC account balances can be taken from job to job.

Americans may be under-prepared for retirement, but a return to older ways of pension provision is not the solution.