ON-Lion Letter

"In recent decades, U.S. private-sector employers have increasingly offered retirement benefits through defined-contribution retirement (DC) plans," begins an August report by Josh B. McGee from the Center for State and Local Leadership (CSLL) at the Manhattan Institute for Policy Research.  "The share of workers who are offered a retirement plan through their employer and who participate only in a DC plan has increased -- from 16 percent in 1979 to 69 percent in 2011.  Yet the vast majority of American public-sector workers (75 percent) still earn retirement benefits under a defined-benefit retirement (DB) plan."

McGee is a senior fellow at the Manhattan Institute and vice president of public accountability at the Laura and John Arnold Foundation.

"The relative merits of DC plans and DB plans have long been debated," he continues.  "Many public-sector employers have recently considered placing new employees in a DC plan; but only two states, Michigan and Alaska, as well as a handful of cities, currently use a DC plan as the primary retirement savings vehicle for new employees.  When state and local governments have considered adopting a DC plan for new employees, they have encountered significant opposition from organized labor, managers of current public-retirement systems, and the cottage industry of consultants that supports public DB plans.

"Critics of DC plans argue that DB plans are more cost-effective because the latter deliver higher investment returns and convert retirement savings into annuities," according to McGee.  "This paper investigates whether such assertions hold up to empirical scrutiny."

McGee finds that "DB plans are not structurally more cost-effective than DC plans;" "DC plans achieve similar investment returns;" "DC plans can -- and do -- offer annuities;" "Pension debt is a significant cost driver for DB plans;" and, "DC plans are a good option for providing retirement security.

"Most current DC plans include a number of plan features -- including well-designed, diversified, professionally managed investment products -- that automatically place participants on a secure retirement path," he concludes.

The Lynde and Harry Bradley Foundation in Milwaukee substantially supports the Manhattan Institute, including its CSLL.

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