Legislators should proceed cautiously in trying to fix problems with cash balance pension plans, lest their well-meaning action cause unintended difficulties, Sen. Chuck Grassley, chairman of the Special Committee on Aging, said today. We're not doing the American people any favors if we suffocate what's left of the defined benefit pension system. The action we take has to be fair to both current and future employees. If we over-compensate, we'll discourage employers from offering pensions.
Proportion is the key.
A worker accumulates a balance over his tenure, then either takes the balance with him when he changes jobs or receives an annuity at retirement. The benefits under many traditional plans spike upward at the end of a long career, Grassley said. Cash balance plans, on the other hand, accrue benefits more evenly over an individual's career. This means short-service workers will have more in benefits earlier in their career than they would under a traditional defined benefit plan. But many cash balance plans often reduce the rate of future benefit accruals in, and some also discontinue, existing subsidized early retirement programs.