Response to Americans for Tax Reform: "Pension Liberation"

[Guest Franklin Evans]

>>>With Dave's kind permission, I am posting the text of my letter concerning this article, the text of which is linked thru BL What' New for 11/04/98. Please feel free to copy this posting, but only if you keep it intact; I don't want my words edited without my knowledge or permission. I've had to do some editing here, as my MSWord formatting doesn't translate well.<<<

Americans for Tax Reform

1320 18th Street, NW Suite 200

Washington, DC 20036

November 6, 1998

To whom it may concern:

I am a pension plan administration professional. I have been directly or indirectly involved with qualified pension plans for over 20 years. I am also a subscriber to BenefitsLink, a WWW service for people like me who want or need to keep current on benefits issues. BenefitsLink recently had a link to your web site publication of an article titled "Pension Liberation", by Peter J. Ferrara.

I am quite frankly appalled by this article. It is obviously written for the layman who knows that there is an issue here but depends on experts to explain the ramifications of the issue. The article is full of emotionally laden usages, intended to raise the blood pressure of the reader while avoiding educating the reader in the facts. I admit up front that the quotes I use below are taken out of context, but I do this with the belief that the context has no effect on the intended meaning of the quoted text.

• "Over the past 20 years, the private sector has shifted dramatically towards "defined contribution" pension programs, where the employer pays a specified amount into an investment account for the worker and benefits equal what these accumulated invested funds can finance. The number of private sector employees in such plans soared from 11 million in 1975 to 43 million in 1995, an increase of about 300%. Contrast that with the stagnation of private defined benefit plans, where the employer promises a specified retirement benefit and saves and invests the funds in a common investment pool to finance those benefits. From 1975 to 1995, the number of private sector employees in such plans grew by less than 10%, from 33 million to 36 million."

This opening statement is a clear abuse of statistical data. The author makes no mention of why private sector employers have been moving away from Defined Benefit plans, starting with Congressional action adding to the administrative cost of DB plans, and ending with the recent combination of leveraged buyouts and hostile takeovers raiding the surplus assets of "rich" DB plan investments.

"Yet, in the public sector, government employees remain overwhelmingly tied to old-fashion defined benefit plans." Emphasis added. DC plans have been around as long or longer than DB plans. This description of DB plans is intended to manipulate the reader.

Mr. Ferrara begins a detailed comparison of Defined Benefit and Defined Contribution plans. I preface my comments with two facts: a pension plan is usually designed by committee often subject to collective bargaining agreements, and when there is a choice available such as the vesting schedule the same choices are available to both types of plans.

DB: "The workers may be required to make some contribution as well." Some DC plans may require employees to make contributions in order to receive matching employer contributions.

DC: "...the employer simply contributes a specified percentage of the worker’s salary, typically 7%-10%, to an individual investment account for the worker. The orker may be required to make a contribution as well, perhaps 3% of salary." The author fails to mention that the percentage of salary for employee contributions to a DB plan is typically 3% and often is less than in DC plans because of the matching contribution provisions mentioned above.

DB: "The worker typically gets back any contributions he made to the common pool, plus interest." Emphasis added. I asked my daughter this morning what she thought "typically" means, always or usually. She correctly chose usually. I challenge Mr. Ferrara to cite a public sector plan at any time during the last 24 years (since the passage of ERISA) that was designed to refuse to refund an employee’s contributions.

I could go on to more detailed comments, but I’ll limit myself to Mr. Ferrara’s creative comparison of vesting provisions. It is true that public sector plans of both types require relatively long terms of service for employees to become 100% vested in their pension benefits. I have seen many Summary Plan Descriptions use language that explicitly states the employee is being rewarded for his longevity with the employer. An employer’s perspective on vesting is often to limit the immediate gratification desired by some workers who look to profit from generous contributions, and to curb employee turnover; we all know that it is expensive to frequently train new employees. It is also true that public sector employees and their unions are pressing for better vesting schedules in line with those imposed on qualified plans.

My personal reaction to Mr. Ferrara’s article is two-fold. If he intended to get the reader angry at the alleged waste in public sector pension plans, he fails to mention the best possible reason for choosing DC plans: the whole point of pension contributions in the private sector is that they are tax deductible; this is obviously not true of the public sector; DB plans by far provide the largest deductible contributions. If he intended to present the objective facts, his article needed to be at least three times as long. Either way, Mr. Ferrara’s article is, in my opinion, at best dangerous in its use of partial truth and its omissions.

I am writing as a private citizen. The views expressed by me do not represent the views of my employer. I am open to discuss any issues pertaining to pension plans with the author or any member of ATR.

Sincerely,

 

Franklin J. Evans

762 S. 18th St.

Philadelphia, PA 19146-1836

Franklin_J_Evans@vanguard.com

[Note: This message was edited by CVCalhoun]

[Guest CVCalhoun]

Just for the record, in light of the preamble to Franklin Evans' post, above, I promise that my edits were done with his knowledge and permission, and did not affect his words--only some coding problems arising from the peculiarities of this board.

[Guest Franklin Evans]

I had hoped to spark additional commentary on the article mentioned in the link above. Maybe it's all too controversial, I don't know.

I did some further exploring at the Americans for Tax Reform web site. Their agenda is quite clear: Reagan-style (as in Ronald) economics is their goal, and they apparently are not interested in open dialogue; they have refrained from replying to my letter either via USPS or e-mail, and I've not seen anything that looks like a discussion forum, unless it resides behind their "members only" barrier.

I'm not trying to steal audience from here, but I do encourage interested parties to take up this issue on the Pension Policy in the United States message board, of which coincidentally I'm the new moderator.