Will one company’s return to a defined benefits plan inspire a pension renaissance?

Happy first day of spring! We missed our regularly scheduled issue last week due to technical issues. Our apologies — let's get caught up. 

In the previous issue of Retire with Money, we explored the growing wealth gap affecting Americans’ retirement outcomes. While the average 401(k) saver saw major gains last year, almost half of the country is still facing financial insecurity in retirement.

A closer look at recent research suggests that the shift away from pensions in the private sector is a major driver of wealth inequality among older Americans. The National Institute on Retirement Security, or NIRS, found that among retirees with pension income, 91% lived above 200% of the federal poverty level. (That’s currently $23,120 for single retirees and $32,180 for couples.)

By comparison, only 60% of retirees without pension income lived above that threshold. What’s more, another analysis by the Congressional Budget Office found that the shift away from pensions may be responsible for roughly one-fifth of the increase in the nation's wealth inequality from 1989 to 2019.

The obvious solution, then, is to restore pension plans for workers, right? IBM, one of the largest companies in the U.S., did just that. It ended its 401(k)-matching program and reopened its old defined benefit program in the fall, leading many to wonder whether other companies will follow suit.

It’s not so simple, says Dan Doonan, executive director of NIRS. While IBM is considered a trendsetter when it comes to human resources policy, its “Retirement Benefit Account,” which the company says is part of its personal pension plan, isn’t exactly like a traditional pension.

Doonan explains that the move by IBM was largely situational. The tech company had a surplus of $3.5 billion in its old defined benefit plan, which it closed nearly 20 years ago. IBM can now use that surplus to pay for employees’ retirement benefits instead of company cash.

One recent study determined that only a handful of other large companies with a large surplus left in closed pension plans could potentially follow IBM’s lead.

There are plenty of reasons why private companies are unlikely to create or reinstate defined benefit plans. You can read my story to find out why — and if you’d like to share your own retirement story or savings experience, drop me a line at mcags@money.com.

— Mary Ellen Cagnassola, Money reporter

A couple weeks ago, we covered the looming Social Security funding crisis. A Retire with Money subscriber, Mike, asks:

I remember reading that part of the Social Security shortfall is that back in the 1980s, the federal government raided its funds and used the money for other things. Did they ever pay that back to the Social Security trust fund?

I’m glad you asked, Mike. This is one of the top misconceptions about Social Security, and one I’m sure others have heard about as well.

Social Security is invested in special U.S. Treasury securities. While the federal government cannot "raid" Social Security, it is allowed to borrow from it to spend proceeds on other programs. However, this is a loan, and it has to be paid back to the program — with interest. Social Security then redeems the securities to pay benefits.

The government has always fully repaid Social Security when it has borrowed from the program. In the 1980s, Social Security was experiencing similar cash flow issues as it is today, so the trust fund that pays retirement benefits (officially called: the Old-Age and Survivors Insurance (OASI) Trust Fund) borrowed money from other Social Security trust funds. In 1982, the OASI fund borrowed $17.5 billion from two sources — the Disability Insurance Trust Fund and the Hospital Insurance Trust Fund (aka Medicare).

The feds started repaying this loan in 1985, and it was paid off by the spring of 1986, ahead of the 1989 deadline.

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• 📖 How do we fix retirement? Economist Teresa Ghilarducci appeared on The Indicator from Planet Money podcast to talk about the solutions she lays out in her new book, “Work, Retire, Repeat: The Uncertainty of Retirement.”
• 🇺🇸 Republican presidential nominee Donald Trump suggested “cutting” retirement entitlements as a solution to Medicare and Social Security funding shortfalls, prompting pushback from President Joe Biden.
• 🌖 In a Fidelity survey, two-thirds of Americans said they would rather work for pleasure and preferred a phased retirement.