Pensions -- A Consistent Strike Issue

We're seeing it over and over again. Pensions are a consistent strike issue. It doesn't mean that every striking group gets or keeps a pension, but what we are seeing is that labor unions that do make pensions a strike issue or either getting (or keeping) those pensions or are receiving very significant concessions from management in other areas.

Yes, those kinds of pensions. The ones that reward long service and provide guaranteed lifetime income paid from an employer-sponsored, employer-provided plan. Those same pensions can benefit employers too, but instead of looking at how they might be useful or even accretive to the business when everything is considered, many companies simply look at pensions as an evil, albeit not a necessary one.

Let's consider the pros and the cons of these pensions. While I started by mentioning pros as is the custom {cons and pros simply sounds awkward], let's start with the cons.

Pensions cost money. They cost money over the long term. In fact, they are a form of deferred compensation. That is, an employee gives up current compensation to receive compensation in the future of presumably equal value. Because of that, there are several costs: the cost of administering the pension, the accounting or accrual cost of the pension, and the cash cost of funding the pension. 

Those last two are not additive. In fact, they are duplicative, separated only by timing. It's that separation, however, that has over time caused many organizations to stop offering pensions. You see, in a 401(k) plan, a company expenses for a year the amount it pays for the year [sometimes off by a very minor timing differential, meaning weeks or months, not years]. In a pension plan, that same company might have a prepaid pension cost (it has funded more than it has accrued) or an accrued pension cost (it has accrued more than it has funded) on the balance sheet.

But don't tell me pensions are inherently too expensive. I can design a pension plan to have a typical cost of essentially whatever amount you are willing to spend. You want a pension that costs 1% of payroll? Just like a 401(k) plan that costs 1% of payroll, it won't provide large benefits, but I can design it. You're willing to provide a plan that costs 10 times that, I can design it too.

There are more pros than cons. Pensions have been shown to be a useful tool in attracting and retaining workers. They can be used as a workforce management tool. And, they do a far better job of evening out the retiree wealth gap in ways that are consistent with your DEI initiative than do 401(k) plans. 

How do I know that workers want pensions? I see what they are asking for. In the UAW strike, they asked for pensions. The companies made large concessions to convince the UAW brass to give up on that piece. In various hoospital strikes, workers have asked for and are asking for pensions. In fact, my own research shows that the most asked for elements in union demands in strikes in 2023 have been more pay and pay increases, better working conditions, and pensions. Yes, pensions. In the same strikes, I've not seen demands for different 401(k) investment options, 401(k) auto-enrollment, or 401(k) in-plan annuities. Yes, I'll grant you, the latter have been the outcome in some cases, but they have been a union concession in order to get something else they really want or need.

Another major clue that workers want pensions comes to me from employers. One such employer that froze its pension noted that employee turnover has increased noticeably (they haven't measured it exactly yet) and that they expect the cost of turnover exceeds the cost of providing a pension. Another employer in an industry that is struggling with hiring said they have no problem doing so. They simply trumpet their pension and recruit at competitors that don't have one. 

In Franklin Templeton's "Voice of the American Worker" survey published in early 2023, the number one financial issue for American workers is financial independence in retirement. Yes, mean 401(k) account balances are large, but means are skewed by the large account balances. When we look at medians, however, (50% of balances larger and 50% smaller), they are entirely inadequate. 

Even the data coming from the large 401(k) recordkeepers show that roughly (some report more than 50%, some less than 50%) half of American workers are on track to retire. If you, unlike me, think that is a good thing, let me recast that data point.

If 50% of Americans are on track to retire, then the other 50% can't retire. So much for the American Dream. 

It's no wonder pensions are a consistent strike issue. When the Big 3 US automakers offered pensions, you didn't see their lifelong UAW workers not being able to retire. In fact, my observation is that they have tended to live better financially in retirement than they did while they were working. 

Consider that cost of unwanted turnover. Consider the cost of unhappy workers sticking around. Consider what a pension might do to fix that.