from NIRS, The McGee study:
- Claims that DB plans are not structurally more cost-effective than DC plans. But, NIRS data and empirical evidence shows otherwise. DB plans can deliver a target retirement benefit at half the cost of a DC account.
- Says DC plans get similar investment returns as DB plans. But, the analysis fails to use public pension data, and it conveniently ignores asset allocation shifts in private sector pensions due to “frozen” pensions.
- Indicates the DC plans can offer annuities. But, few offer annuities and even fewer retirees choose annuities because they are costly. The author conveniently ignores these costs or seeks to buy them from the DB plan.
- Says pension debt is a significant cost driver for DB plans. But,
this is not relevant to the economic efficiencies of DB plan – just like
funding shortfalls and asset leakage are not relevant to measuring the
efficiency of DC accounts to deliver adequate income replacement.
- Indicates DC plans are a good retirement security option. DC plans can be well designed, but the one public DC plan that might come close to the cost efficiencies of public pensions relies on the state DB plan to provide lifetime income. Luckily, this state reopened the DB plan to new employees and most of them actively make elections to join the DB pension.
For a Contrast between a Defined-Benefit Pension Plan and a Defined-Contribution Savings Plan, click here.
“This independent analysis is consistent with two recent NIRS studies:
- Still a Better Bang for the Buck finds that the economic efficiencies embedded in pensions enable them to provide the same retirement income as an individual account at about half the cost.
- Case Studies of State Pension Plans that Switched to Defined Contribution Plans finds that defined benefit to defined contribution switches drove up costs and failed to close funding gaps.”