Union Workers Would be Better Off With a 401(k)

Union pensions in poor shape

Unions may tout the value of defined-benefit pensions, but a new survey of multi-employer pension programs shows that union pension plans in particular are more and more dangerously underfunded

The consequence of this underfunding is pension failures, and workers who were told their retirements would be provided for being forced to live on much less than they had expected. The defined-contribution retirement savings programs programs that are common outside of government and in non-union workplaces are not without their challenges, but they leave workers with much more control over their retirements, and that may prove to be a much better deal over the long haul.

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In a defined-benefit pension, workers are guaranteed a certain amount for retirement, normally based on their wages and years of service, but retirement funds are controlled by pension administrators who collect and invest retirement funds. As long as the plan is adequately funded and the investments are made competently, the system should work, but much depends on the competence of the pension administrators.

By contrast, defined-contribution programs allow workers to set aside tax-exempt money that they can control and invest. The responsibility of managing one's own money can be challenging, and most workers will not use their accounts to invest in complex or risky ventures, but rather choose to invest in diversified and professionally managed mutual funds. Still, the fact that workers ultimately are responsible for their own retirement sharpens the incentive for whoever manages the funds to do so with an eye on the bottom line, and at the same time encourages workers to become more engaged and economically savvy themselves. Defined-pension programs are easier for workers, but easier isn't always better.

That's especially the case when union multi-employer pension funds appear to be underfunded by as much as $369 million. According to Credite Suisse, these pension funds hold only 52 percent of the money they need to meet their expected obligations. The Federal Pension Benefit Guarantee Corp. puts the figure even lower, at 48 percent. As a rule of thumb, a pension fund should have at least 80 percent of the money it needs to meet its obligations, and at less than 60 percent a pension fund is approaching critical. The PBGC itself admits to being $23 billion in the red, so if any of these pensions fail it will be up to taxpayers to bail out retirees.

The looming crisis in union pension funds is one more example of the many ways in which the union establishment, for all its lofty rhetoric and ambitious politics, has failed to represent the real best interest of workers. Those union workers would be better off trusting unions less and taking charge of their own finances instead.