Private insurance can cure pension problems
TEXT OF COMMENTARY
MARK AUSTIN THOMAS: This week the House and Senate are working quickly to reform the nation’s private pension system. It’s also referred to as a “defined benefit” program. Lawmakers are concerned that too many companies default on their pension obligations. That often leaves the government holding the bag. Congress wants to create a law that would force companies to set aside more money to fund retirement plans. But commentator Barry Nalebuff has a different suggestion.
BARRY NALEBUFF: Defined benefit plans make all the sense in the world. That’s because all employees are covered-automatically.
Even more importantly, defined benefit plans make sense because companies are in a better position to pool money and invest it over time than individuals with defined contribution plans like 401ks.
The trouble is many companies with defined benefit plans don’t put enough aside. They pretend things are OK by exaggerating the returns they expect to get in the future.
Today, defined benefit plans are under-funded by $400 billion.
Fortunately, there’s the pension benefit guarantee corporation to bail out these companies and their employees. The PBGC insures pensions up to about $48,000 for folks who retire at 65. But you are out of luck if your promised pension was any bigger than that.
My solution is private insurance to cover the gap. After all, we’ve got Medigap insurance to cover what Medicare doesn’t.
Private insurance companies should offer policies that protect the uninsured portion of an employee’s pension if their employer goes belly up.
Employees could pay for that insurance or negotiate to have their firms pick up the tab. If companies had to buy pension gap insurance that would guarantee that they’d fund their pension plans at the right level. Otherwise, the premium would be sky high.
And if employees are the ones to buy that insurance, you can be sure that workers and unions will pressure companies to fund their plans and keep premiums affordable.
Right now, defined benefit pensions are broken. So firms are abandoning ship and moving to defined contribution plans. That’s just creating a new problem 30 years down the road when workers’ paltry savings won’t be enough to retire on.
Instead, we should use private insurance not to just to fill the gap, but to set the true price of risk.
MARK AUSTIN THOMAS: Barry Nalebuff teaches at the Yale School of Management. In Los Angeles, I’m Mark Austin Thomas.
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