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Workers lose in cash balance pension plans

Workers generally lose retirement benefits when employers switch from traditional pensions to cash balance plans, a congressional study released  Friday said.
/ Source: Reuters

Workers generally lose retirement benefits when employers switch from traditional pensions to cash balance plans, a congressional study released  Friday said.

And the study by the Government Accountability Office (GAO) said that older workers lose more benefits than younger ones when plans are changed.

Hundreds of companies switched to cash balance plans in the 1990s, through which workers have an individual account balance based on pay credits and interest.

Traditional defined benefit plans, by comparison, have a fixed payout at retirement based on earnings and years of service. These plans have declined over the years because employers contend that they are too expensive.

The GAO said that 86 percent of workers age 30 at the time of a conversion of retirement plans, and 90.4 percent of workers age 40 would receive lower retirement benefits from a cash balance plan.

Of those aged 50, 49.8 percent would receive lower benefits as a result of the conversion. Others were helped by transition protections for older workers, the GAO said, which can include allowing older workers to choose the plan they want.

When workers lost benefits, the cuts were greater the older the employee. For 30-year-old workers, the median loss in retirement benefits was $59 per month, while the median loss for 50 year olds was $238 per month.

The GAO study was seized on by critics who have argued that cash balance conversions penalize workers, especially older ones. An IBM cash balance pension plan received national attention in 2003 when a judge ruled it was age discriminatory.

“This independent analysis from the GAO confirms that, without some protections, everyone loses,” said Sen. Tom Harkin, an Iowa Democrat.

Harkin, Vermont Independent Rep. Bernie Sanders and California Democrat Rep. George Miller, who requested the study, said it showed that pension legislation in Congress should mandate protection for older workers affected by cash balance conversions. The Senate version has such a provision.

But business lobbyists said that many of the roughly 1,700 cash balance plans covering 8.5 million people already protect older workers and that, in any case, the pension system is voluntary for employers.

“What about comparing it (a cash balance plan) to no plan? Companies could just say, let’s not have a pension plan,” said Lynn Dudley, vice president for retirement policy at the American Benefits Council.