Let’s do a little comparison, shall we. Individually owned retirement accounts including 401(k)s and IRAs have lost as much as $2 trillion between the market peak in October 2007 and the end of 2008, according to a story in the Wall Street Journal.
State defined-benefit pension plans lost $865 billion over the same 14-month period, but states will try to fund their shortfalls with taxes on the same people with 401(k)s and IRAs. Companies that offer defined-benefit pensions also face a $109 billion to $200 billion shortfall this year. In addition to this $1 trillion-plus of lost value, there are the cities, counties, and other layers of government that have lost money in their pension plans.
What do these numbers mean for the value of different pension systems?
Not much.
First, IRAs are often supplements to 401(k)s or other pensions, so their losses may not be as significant as the Journal article suggested.
Second, while individuals can make bad decisions or get slammed by bad timing, they see the result of their decisions and the market. Those covered by a defined benefit pension are just as vulnerable to reductions in their future payments due to the decisions of other or the market.
In short, defined benefit pensions really do not shift risk to the employer. For more on pensions see here.
