A recent article in Institutional Investor by Fran Hawthorne, "Claim s that 401(k)s Beat Defined Benefit Plans Stirs Controversy," analyzes the findings of an Employee Benefit Research Institute (EBRI) Issue Brief claiming that defined denefit (DB) plans do worse than defined contribution(DC) plans for all incomes.

Hawthorne’s critique points out the weaknesses of the EBRI study. These include the fact that the study includes only data on voluntary 401(k) plans, which have higher contribution rates than the more prevalent automatic enrollment plans, that it uses unrealistically high rates of return on stocks, and that it ignores the fact that employers contribute 'free money' toward DB plans, but do not need to contribute to DC plans.  

Hawthorne is thorough. However, she overlooks two significant problems. First, EBRI overstates the retirement plan coverage and participation rates for workers, especially following an unemployment spell; this is especially important in the aftermath of the Great Recession. Second, it uses an implausibly high growth rate of average hourly earnings. EBRI’s findings are partly a result of these skewed assumptions.

These concerns are spelled out in a Huffington Post Business blog, jointly written with SCEPA Research Economist Joelle Saad- Lessler. 


On July 9, 2013, The New York Times reported that U.S. Senator Orrin Hatch (R-UT) announced a new proposal to allow the life insurance industry to manage public pensions.

Senator Hatch's high hopes that insurance companies are better insurers of public pensions than municipalities and states is based on three false beliefs.

  1. States regulate insurance companies better than their pension funds.
  2. Insurance companies will insure pension funds cheaper and more efficiently than state and local pension funds.
  3. Insurance companies are more secure than state and local governments.

Each of these assumptions is wrong.

Governments have promised their employees these benefits, so they can't simply "get the obligation off their books" by privatizing the management of the funds. Further, insurance companies are for-profit institutions – shareholders come first – so they charge more than state and local pension funds. Also, as we have seen, insurance companies can fail, requiring huge government bailouts. Examples abound, with AIG foremost in memory. At the state level, Executive Life took over California's pension funds in the 1970s and then went belly up. Pension beneficiaries lost everything.

Senator Hatch argues he is earnest. He wants to help state and local governments, not insurance companies. His theory is that pensions would come off municipal books and benefit from more reliable contributions.

But state and local governments could pay their pension obligations with a simple administrative and actuarial fix - by looking at their assets and liabilities and figuring how much they have to pay each month. This is called 'easy math,' a concept familiar to anyone with a mortgage.

The problems faced by some state and local governments are not structural. Rather, a minority of governors and mayors took pension holidays. They liked paying nothing, diverting funds from their pension obligations to other budget lines. Rather than creating a new structure for public pensions, Senator Hatch, the ranking Republican on the Senate Finance Committee, could hold hearings highlighting this political failure and calling for these localities to pay what they owe.

Contrary to Senator Hatch's intention, this proposal would expose public pensions to more insecurity, not less - while boosting industry profits.


New York TimesOn June 24, 2013, University of Massachusetts Amherst Economics Professor Nancy Folbre described the retirement crisis as sinking rowboats. Her point is clear - our current 401(k)-dominated retirement system doesn't work for the individual doing yeoman's work trying to get to retirement security.

She backs up this statement with numerous reports and data, including the National Institute on Retirement Security, books by Jacob Hacker and myself, the Center for Retirement Research at Boston College, the Transamerica Center for Retirement Studies, and my report on GRAs for the Economic Policy Institute (EPI). These sources support Folbre's conclusion, that we need a retirement security system that puts us all in the same boat...an ocean liner. 


I am pleased and honored to join the U.S. House Subcommittee on Health, Employment, Labor, & Pensions on Wednesday, June 12th at 10:00a.m. as a witness for their hearing, "Strengthening the Multiemployer Pension System: What Reforms Should Policymakers Consider?" Please watch the live webcast.


On June 9, 2013, NPR's story, "Golden Years Tainted as Retirement Savings Dwindle" reports on a study on the next generation's ability to retire. "Gen. X looks to be the first generation that will not exceed the wealth of the group that came before them, and to potentially face downward mobility in retirement," says Erin Currier, director of economic mobility for the Pew Charitable Trusts. This is similar to conclusions I have found in my own work on SCEPA's Retirement Income Security project, where the current retirement system is failing future retirees. The article includes my quote, "There has to be new institutions that guarantee a modest but safe continual rate of return," she says. "And we can do that by adding to the Social Security system, a place where people can save their money and get a rate of return that's safe."

Pew chart


On May 16, 2013, SCEPA Director Teresa Ghilarducci joined a panel discussion hosted by the Economic Policy Institute (EPI) on Robert Kuttner's new book, Debtor’s Prison: The Politics of Austerity Versus Possibility. Below are her comments on the structural shift of risk:

"The last 20 years has seen significant growth and change in the character of interactions between working and middle-class households and financial institutions and markets.1

With this financial development and households' increased exposure to financial risk, academic economists and others have embarked on a new inquiry, a body of study some call the "culture of finance." This is the name of an NYU seminar taught this summer featuring business faculty, anthropologists, and investment bank economists. Other scholars call this line of inquiry the "financialization of households," and even others embed it in literature as the "culture or varieties of capitalism" (see among others David Soskice and Peter Hall).2

Generally, the project seeks to understand how and why individuals and households are taking on more and more economic risk. These risks were once managed by government and employers, and sometimes social insurance arrangements or employee benefits, such as pension plans, unemployment insurance, and default risk by banks. These institutions have been replaced by financial institutions and products, and are key to the story of how corporations and banks have shifted the risk of financial loss to households.

The fact that the U.S. retirement is in crisis is no secret here or abroad. On May 14, 2013, The New York Times article How They Do It Elsewhere highlighted a recent Mercer study that graded the retirement systems in the advanced industrialized countries. Not surprisingly, the U.S. received a mediocre C. Considering that the retirement system is failing millions of Americans each year, one might wonder if they graded on a curve.

Every country is worried about investing retirement funds correctly, and every country wants to minimize risks to the taxpayer so there aren’t large, unknown bills in the future. In the United States, we use our tax code far more than other countries to try to encourage savings and other socially beneficial behavior. We spend hundreds of billions of dollars to try to incentive saving for retirement through 401(k)’s and I.R.A.’s. That costs us a huge amount of money without much effect creating a secure retirement system. In fact, America’s voluntary system means that nearly six out of 10 workers are not in pension or 401(k) plans.