Pension Returns Outperform 401(k)s

Thursday, September 07, 2006

Rewarding Work

401(k)s Delivering Worse Financial Returns than Traditional Pensions

In the last few decades, there has been a massive shift from traditional defined benefit retirement plans -- where workers are guaranteed a yearly return in retirement -- to defined contribution plans like 401(k)s where money may be contributed each year with no guaranteed return. The numbers are stark: of workers with pensions (which includes today only 60% of the population), 83% had defined benefit plans in 1980, while only 39% had a defined benefit plan by 2004.

When politicians began promoting 401(k) plans in the early 1980s, the promise was that what workers might lose in guaranteed security, they would make up in higher financial returns in "controlling their own money." Except it hasn't worked out that way.

A just released report by the Boston College Center for Retirement Research (CRR) found that between 1988 and 2004, traditional defined benefit plans outperformed 401(k) plans by a full percentage point. Where defined benefit plans earned 10.7% in annual returns, comparable 401(k) plans earned just 9.7% per year in returns over that same period. Returns for IRAs, for which data is harder to collect, appear to be even worse. Other studies have shown that defined benefit plans outperform 401(k)s by even larger amounts each year -- a difference that adds up to hundreds of thousands of dollars over a lifetime.

A large part of the problem are the much larger fees collected by money managers in 401(k) plans, which undermines long-term returns in those plans. Unsurprisingly, the firms already collecting those large 401(k) fees have been pushing state governments to eliminate defined benefit plans. As the new CRR report highlights, such a move promises only fatter fees for financial firms and lower financial returns for public employees and taxpayers.

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Strengthening Communities

MN: Blue Cross Calls for Forced Universal Health Coverage

The Blues have joined the health care for all bandwagon in Minnesota. The state's Blue Cross Blue Shield is endorsing a bill based on the Massachusetts model of achieving health care for all through compelling the purchase of insurance, highlighting both a key strength and a key weakness of the model. The mandatory nature of the law builds bridges to new interested parties: insurance firms well positioned to benefit from a law requiring that the public purchase their product.

But self-interested stakeholders should be treated with skepticism. Minnesota is currently home to 400,000 uninsured. Blue Cross's plan, modeled on the Massachusetts/Romney model, would cost $911 million a year -- roughly $2300 per uninsured Minnesotan. The state Health Department ran its own estimates earlier this year and predicted that MinnesotaCare could insure the uninsured for $663 million, almost one-third less the cost.

The savings of public v. private programs is unsurprising. An independent study found that a single payer system in California would generate enough savings through increased efficiency to extend health insurance universally in the state at no net increased cost statewide. BusinessWeek recently declared the Veterans Administration the most efficient health care system in America, another example of the benefits of integrated health care delivery.

Blue Cross Blue Shield of Minnesota is a non-profit. And new members in the coalition for health care for all are welcome. But the priority in crafting public policy needs to be attaining the goals of affordable quality coverage for all.

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Strengthening Communities

CA: A Progressive Agenda in Action

The Los Angeles Times has a rundown of bills passed by the legislature-- and for those wondering whether progressives have an agenda, it's a pretty good illustration of what could be done with a progressive majority. Many of these items may get vetoed by Arnie, but it's still an impressive list. Here are the highlights:

Bonds: $37 billion in bond issues to relieve traffic congestion (Proposition 1B), build low-cost housing (Proposition 1C), repair and expand schools (Proposition 1D), and strengthen levees (Proposition 1E).

Clean vehicles: Bill (AB 1012) would require the state to set regulations by 2010 so that by 2020, half the new cars and light trucks sold in California would use an alternative fuel, such as electricity, compressed natural gas or hydrogen fuel cells.

Driver's licenses: Bill (SB 1162) would allow California to issue driver's licenses for driving only, not for use as identification, to people who cannot prove they are in the country legally.

Equal Rights: Bill (SB 1441) would ban discrimination in publicly funded or operated programs based on sexual orientation or gender identity.

Gays in textbooks: Bill (SB 1437) would ban the state Board of Education and school districts from adopting textbooks that "reflect adversely" on people because of their sexual orientation.

Greenhouse gases: Bill (AB 32) would require the state air board to adopt regulations to shrink California's output of carbon dioxide, methane and other gases linked to global warming to 1990 levels by 2020. Another bill (SB 1368) would require power generators, when selling long-term contracts to California utilities, to meet greenhouse gas emission standards.

Health Care for All: Bill (SB 840) would create a California health insurance system to provide health insurance to every Californian, eliminating the current patchwork of private and public insurance.

Hospital fines: Bill (SB 1312) would allow the state to fine hospitals as much as $50,000 for patient-care lapses that cause serious injury or death. It also would require the Department of Health Services to enforce state standards at nursing homes, in response to reports last year that state inspectors had begun using more lax federal standards.

Locked-out workers: Bill (AB 1884) would allow workers who are locked out in a labor dispute with their employer to get unemployment benefits.

Minimum wage: Bill (AB 1835) would raise the California minimum wage from $6.75 an hour to $7.75 in January and $8 in January 2008.

National popular vote: (AB 2948) California would join a compact of states that agree to award their Electoral College votes to the presidential candidate who wins the most votes nationwide, not the candidate who wins the most votes in each state.

Prescription drugs: Bill (AB 2911) would require the state to negotiate discounts on medicine for roughly 6 million low-income Californians and would allow the state, starting in 2010, to make it more difficult for drug companies that don't offer discounts to sell their products to the state-run Medi-Cal program, which spends roughly $4 billion a year buying drugs.

Public records: Bill (AB 2927) would allow the public to get public records via computer and allow citizens to appeal to the attorney general when state or local agencies deny their requests for records.

Student aid: Bill (SB 160) would allow students without legal immigration status to get financial aid at California public colleges and universities.

Tenants: Bill (AB 1169) would require landlords to give tenants who have been renting from them for at least a year 60 days' notice of eviction, double the current requirement.

Welfare: Bill (AB 2192) would allow people convicted of certain drug-related felonies to get CalWORKS benefits as long as they prove they are enrolled in or have completed a government-recognized drug treatment program.

401(k)s Delivering Worse Financial Returns than Traditional Pensions

Boston College Center for Retirement Research, "An Update on Private Pensions"
AFL-CIO, "Wall Street Greed: Front Groups for the Attack on Retirement Security"
AFL-CIO, "Public Employee Pensions Under Attack"
SEIU, "Defined Benefit Plans vs. Defined Contribution Plans"

MN: Blue Cross Calls for Forced Universal Health Coverage

Progressive States Network, "The Massachusetts Health Care Model: Expanded Coverage with a Heavy Burden on Working Families"
Lewin Group, "The Health Care for All Californians Act: Cost and Economic Impacts Analysis"
BusinessWeek, "The Best Medical Care in the U.S."

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Eye on the Right

Pensions are in the public eye in a big way recently. There's little reason to be surprised about that fact. Wall Street has a highly coordinated effort to push for a move from pensions to individual 401k style accounts. Individual accounts mean higher fees for firms. The downside is lower returns for workers, but that's not Wall Street's top priority. The movement isn't just at the federal level. In the states, next year is set to be a major year for fights over pension security.

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Matt Singer
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