Pension mavens have long recognized that Fundamentals of Private Pensions is one of the few classics in the field, a work that no pension library should be without. Accordingly, it is a pleasure to welcome the 9th edition, published under the auspices of the Pension Research Council of the Wharton School, and featuring a dream team of authors: Dan M. McGill, Kyle N. Brown, John J. Haley, Sylvester J. Schieber, and Mark J. Warshawsky.
As always, the book's coverage is comprehensive and includes an array of empirical and statistical data in addition to thorough coverage of the laws and policies that shape the American retirement system. The book provides good coverage of recent developments, including the Pension Protection Act of 2006, the growth of hybrid plans and the (slow) emergence of phased retirement. The book also includes a good chapter on the most problematic issue arising from the trend towards defined contribution plans, namely the risk that individuals will outlive their resources in retirement.
Although the pension laws have been amended frequently since the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), these changes have mainly tinkered with the rules, not always for the better. For at least the last 15 years, pension scholars have been advocating systemic changes. ERISA responded to problems and workplace conditions of the 1960s: today's problems and conditions are very different.
The need for change has become more urgent as a result of the recent financial crises. However, the Obama Administration faces major problems that must take priority over changing the private pension rules including: two wars; reinvigorating the economy; the credit crisis; the health care system in general and Medicare and Medicaid in particular; and putting Social Security on a firmer financial footing. Pension reform is controversial: will this Administration or Congress have the time or the political will to address fundamental, long-term reform?
Despite all efforts by Congress, private sector pension coverage has hovered around 50% for several decades, and the percentage with adequate coverage is far less than 50%. Recent legislative initiatives have focused on encouraging individuals to save more for retirement: but in the present environment that approach is unrealistic, particularly for the lower income workers who are most at risk. Adequate retirement income requires mandates. There is a strong argument for severing completely the link between health care coverage and employment, and perhaps the same approach would, in the long run, improve our retirement system.
One of the great virtues of the book is that it collects and analyzes information from many sources and many disciplines, and I am not aware of any other single-volume work with such broad coverage. Nevertheless, I have a short wish list, probably idiosyncratic, of features that I would like to see covered or covered in more detail, in future editions. The final chapter of the present work discusses the future of pensions, and I suggest that this chapter could be expanded significantly by delving into several unanswered questions.
First, despite some recent cutbacks by major employers, problems of pension coverage and adequacy disproportionately affect part-time employees and employees of small employers. Why is this the case and how can this problem be addressed? Second, it is clear that the rate of contributions must be increased. The current tax incentives are both very expensive and ineffective. What combination of carrots and sticks is best designed to achieve this goal?
Third, it is not enough to get money into the system: we must try to keep it in the system by increasing portability and reducing pre-retirement leakage. Social Security is a good model: but an enhancement of retirement security by increasing Social Security benefits does not appear at all likely to happen. Fourth, the runaway cost of health care and the amount of waste in the health care system directly reduce the level of retirement security, by reducing the amounts available for contribution and by increasing the amount required in retirement.
Fifth, the amount held in individual retirement accounts (primarily rollover IRAs) is now greater than the amount held in private sector defined benefit plans or private sector defined contribution plans, yet the rules governing IRAs have not evolved to reflect this. Sixth, we need to develop a better framework for regulating investments by all types of retirement plans. Finally, we need to develop better distribution alternatives for individuals with account-based retirement savings. We should not expect every retiree to invest successfully and take appropriate distributions over a period of up to 40 years, a period in which mental acuity is likely to diminish.
The authors may legitimately claim that these topics are not part of the book they set out to write. However, their inclusion would make an excellent book even better.
