Why Pensions Are Fading Away

Summary

Podcast Summary: WSJ Your Money Briefing – "Why Pensions Are Fading Away"

Date: October 8, 2019
Host: J.R. Whelan
Guest: Heather Gillers (Wall Street Journal Reporter)
Episode Focus: Exploring the decline of pensions in corporate America, the differences between pensions and 401(k) plans, and what this shift means for workers.

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Episode Overview

This episode discusses the stark decline of traditional pensions in the private sector, prompted by General Electric’s recent decision to freeze pension benefits for 20,000 workers. Host J.R. Whelan and WSJ reporter Heather Gillers examine the underlying reasons for this shift, the fundamental differences between pensions and 401(k)s, and what options remain for those seeking a secure retirement. The conversation contextualizes the broader transition in American retirement planning and notes where pensions can still be found today.

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Key Discussion Points & Insights

The Decline of Pensions in Corporate America

[03:17]

• GE’s Pension Freeze as a Sign of the Times: J.R. Whelan introduces the episode by noting GE’s move as emblematic of a broader trend—the fading of pensions in corporate America.
• Challenges for Employers:
  Heather Gillers:

  “It was just much easier in past decades to earn 7% or 8% on a mixed stock and bond portfolio than it is today. ... With a pension, the responsibility for making up any investment losses or failure to meet investment targets falls on the employer.”

Pension vs. 401(k): Key Differences

[03:17 - 05:07]

• Risk Transfer:
  Heather Gillers explains:

  “A 401k... puts the risk on the employee. ... If they fall short of what the employee was hoping, well, the employee’s out of luck, and the employer doesn’t owe the employee anything.”

• Minimum Guarantees:
  Heather Gillers [05:17]:

  “If you have a pension, the minimum you can get is what your employer promised you... With a 401k, theoretically, the minimum you can get is zero.”

Pensions: Becoming Rare in the Private Sector

[04:30 - 06:22]

• Access Today:
  Heather Gillers notes:

  “Pension programs that are not closed, that are enrolling new workers, mostly exist only in the public sector today for new employees.”

• Statistics & Decline:
  J.R. Whelan [05:59]:

  “In 2017, only 16 companies in the Fortune 500 offered traditional defined benefit plans to new hires. That was down from 238 just two decades ago.”

• Public vs. Private Sector:
  Heather Gillers [06:22]:

  “In the private sector, it’s really rare. ... In public sector employment, this is something that’s still going strong and is often an attractive benefit.”

The Company Perspective on 401(k) Plans

[06:52]

• Portability as a Selling Point:
  Heather Gillers [06:59]:

  “You can work at a company for a very short amount of time and earn money in your 401k and then move it to another employer. Whereas with pension benefits, you often have to work for a certain number of years, several years, before you can, quote, unquote, vest in the pension system.”

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Notable Quotes

• On Shifting Investment Risk ([03:17 – 04:30]):

  “With a pension... the employer has to reach into their own pocket [if returns are low]... A 401k... puts the risk on the employee.”
  – Heather Gillers

• On What Workers Are Promised ([05:17]):

  “With a 401k, theoretically, the minimum you can get is zero.”
  – Heather Gillers

• On the Disappearance of Pensions ([06:22]):

  “It certainly seems [that pensions in the private sector] are a relic of the past.”
  – Heather Gillers

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Timestamps for Key Segments

• 03:17 — Introduction to GE’s pension freeze, overview of pension challenges for employers
• 04:30 — Explanation of the decline in pension offerings, differences between pensions and 401(k)s
• 05:07 — Culture shock for employees transitioning from pensions to 401(k)s
• 05:59 — Statistics on the reduction of private-sector pension plans
• 06:22 — Where pensions still exist today (mostly public sector)
• 06:52 — 401(k) benefits: portability and vesting periods

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Memorable Moments

• The candid assessment of how little is now guaranteed to workers under 401(k) plans compared to traditional pensions was striking, capturing what many find unsettling about the changing retirement landscape.

  Quote:

  “With a 401k, theoretically, the minimum you can get is zero.” – Heather Gillers [05:17]

• The episode highlighted a dramatic statistic – only 16 out of 500 Fortune companies still offer new hires a traditional pension, down from 238 two decades ago.

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Conclusion

This episode directly confronts the fading promise of corporate pensions, offering a concise yet thorough primer on the differences between a secure, employer-funded retirement and the self-directed—and riskier—401(k) world most employees now face. It spotlights the factors driving this transition and tells listeners where pensions, for now, still survive. The tone is pragmatic, and the discussion aims to inform listeners about fundamental changes in how Americans are expected to prepare for retirement.

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Transcript

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[J.R. Whelan]

Here's your Money briefing. I'm J.R. whelan at the Wall Street Journal in New York. GE's decision to freeze pensions for 20,000 workers paints a dreary picture of the state of pensions in corporate America. We'll go into the details in a moment. First, some money in market news you should know Workers may be required to share their tips under a Labor Department proposal released on Monday. The proposed rule would allow employers to require workers such as restaurant servers to pool tips with colleagues that don't traditionally receive tips like dishwashers and cooks. But the rule would only go into effect if the tipped employee is paid the full federal minimum wage of $7.25 an hour. Tipped workers can be paid as little as $2.13 an hour as long as they earn enough tips to match the federal minimum. The rule would effectively wipe out an Obama era policy that tried to do away with a tip pooling practice. The proposed the policy was challenged in court and hasn't been enforced since 2012. Business advocates say the proposed rule would ensure that workers behind the scenes are fairly compensated. However, workers advocates say it would allow businesses to pay back of the house workers less by shifting the burden to compensate them to other employees. This is the Trump administration's second attempt to rewrite the tip rule, and there's a turf battle going on between animal made meat and dairy products and their plant based alternatives. Nielsen says U.S. sales of plant based meats climbed 8% by volume in the past year, while beef, pork and chicken sales were flat. They're also showing up in more fast food restaurants. Burger King added the impossible Whopper to its menus, and McDonald's is testing beyond meat burgers in some Canadian locations. But dairy farmers and cattle ranchers are putting up a fight. Their trade groups are ramping up marketing to draw on the differences between cattle made products and plant made products made from soy, almonds and peas. And these groups are calling for laws to protect the words milk and meat to only refer to animal products. For generations of workers, a pension was the path to a comfortable retirement. But GE this week joined a long list of Fortune 500 companies that have either closed their pensions, frozen benefits, or moved pension beneficiaries to a company 401 plan. Let's bring in Wall Street Journal reporter Heather Gillers to discuss the differences between pensions and 401ks and where workers can still find pensions. So, Heather, what does this tell us about pensions on a large scale at big corporations?

[Heather Gillers]

So there are several reasons why major employers have soured on big pensions. One is the market. I mean, it was just much easier in past decades to earn 7% or 8% on a mixed stock and bond portfolio than it is today. And where a pension differs from a 401k is that with a pension, the responsibility for making up any investment losses or failure to meet investment targets falls on the employer. So if the employer invests your money and they only make 2%, well, they still have to pay you the amount that they would have had if they had made 7%. And whereas where do they go to make up the difference? Well, that that employer has to reach into their own pocket. A 401k, on the other hand, puts the risk on the employee. So the employee, as anyone with a 401k probably knows, gets to pick from some investment choices. But how much money those investments return, that's up to the market. And if they fall short of what the employee was hoping, well, the employee's out of luck and the employer doesn't owe the employee anything.

[J.R. Whelan]

There's a whole generation of people that really don't know what a pension is or how it operates. You did just explain it for us. And the number of companies offering them has dropped dramatically in the last 20 years. People are going to be hard pressed to find a company offering a pension.

[Heather Gillers]

Pension programs that are not closed, that are enrolling new workers mostly exist only in the public sector today for new employees. I mean, you know, people who have been longtime employees on the private sector are still entitled to pensions that they enrolled in years back. But yeah, anyone getting hired by a big company today, they're going to end up in a 401k or something similar.

[J.R. Whelan]

And so for any employee who is going from a pension to a 401k, this is a culture shock because the two types of retirement funds come from two very different directions.

[Heather Gillers]

One way to think about it is if you have a pension, the minimum you can get is what your employer promised you. And you may, through the course of your career, become eligible for extras. But once you've qualified for that pension, that Promised pension amount is the minimum you can get. With a 401k, theoretically, the minimum you can get is zero. There is not a single dollar promised to you. The only thing that's promised to you is whatever the market is able to produce on what you put in there. So, you know, people who retired in the aftermath of the recession likely retired with much, much less if they had 401ks than what they might have supposed based on past market performance.

[J.R. Whelan]

You know, we're in a tight labor market and companies used pension plans at one time to recruit the people that they wanted. In fact, 2017, only 16 companies in the Fortune 500 offered traditional defined benefit plans to new hires. And that was down from 238 just two decades ago. Do you think that pensions in terms of the private sector are a relic of the past?

[Heather Gillers]

It certainly seems that way. I mean, many, many private sector plans are closed. You know, new companies don't tend to adopt PENS plans in private sector employment, whereas in public sector employment, this is something that's still going strong and it is available to teachers and police and other kinds of public workers and is often an attractive benefit in a career that's maybe not as highly paid. In the private sector, it's really rare.

[J.R. Whelan]

But there are still benefits to a 401k and companies do tout the many pros that the 401k provides.

[Heather Gillers]

Probably the number one thing companies, companies will talk about when they are hyping their 401ks is portability. You can work at a company for a very short amount of time and earn Money in your 401k and then move it to another employer. Whereas with pension benefits, you often have to work for a certain number of years, several years, before you can, quote, unquote, vest in the pension system.

[J.R. Whelan]

All right, that's Wall Street Journal reporter Heather Gillers with us on the line. Heather, thanks for coming on the show.

[Heather Gillers]

Sure, anytime.

[J.R. Whelan]

And that's your money briefing. I'm J.R. whelan in New York for the Wall Street Journal.

[Small Business Owner 1]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Small Business Owner 2]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Advocate/Activist]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.