Why pensions are a hot button issue in the Boeing machinists' strike

A major sticking point in the Boeing machinists strike is the question of a return to a defined benefit plan, or pension. Boeing says that's a no go, and has refused to offer one. So far, the machinists, who gave up their pension benefit in 2014, are standing fast. They want it back and voted down Boeing's latest contract offer Wednesday night.

KUOW’s Kim Malcolm talked pensions and their alternatives with Kevin Bay, a professor of finance at the University of Washington's Foster School of Business.

This interview has been edited for clarity.

Kim Malcolm: What's your short answer on what a pension is and how it's managed?

Kevin Boeh: The short answer is the defined benefit pension plan, which is the traditional pension plan that our grandparents had, is a fixed stream of income that is guaranteed that you will get once you retire, until you pass. It's primarily managed by the company.

How do those kinds of pensions compare with the 401(k) style of retirement plan?

This is what most companies offer today. It's a defined contribution, as opposed to defined benefit. We contribute some defined amount along with your paycheck. Depending on the company, the individual employee can make a lot of decisions, and has a lot of discretion as to where the money is invested and how it's invested.

Part of the difference is that the employee, then, is the one who's taking more of the risk about where those funds are invested, right?

Yes, and that's exactly the good and bad of a defined contribution plan. Some employees just aren't very good at managing it. They may be fantastic at their jobs, but this isn't their profession, and unfortunately, some don't do very well.

Not a lot of companies offer pensions anymore. The preference seems to be for the 401(k) plans. Why is that?

The primary reason is that it's costly. A single company is offering and running a program, a pension plan, a retirement scheme, for a handful of employees. And let's say in the case of Boeing, Boeing is very good at making airplanes. They may not be professionals at running a retirement plan.

One of the other reasons that companies have moved away from these historically, is that they're a guaranteed stream of income to the employee in retirement. The idea is that if the investment returns throughout the course of the employee's employment haven't been sufficient, the company itself is the one who guarantees whether the employee gets the money. In other words, the company is putting itself at risk. And let's say they under-contribute through the years, or they underperform in their investment performance. The company is on the hook.

Why do many workers say they prefer a pension?

The basic idea is that it’s a known quantity that you'll be receiving in retirement. Thus, the term defined benefit. You know you will be getting X amount, and then as well, oftentimes, a defined benefit plan will offer a cost-of-living adjustment. Each year, some people will retire and be around for decades. Inflation what it is, that can be an incredibly powerful benefit. That's something you get with a pension, and it's not something you get with a 401(k).

What would it take to bring a pension back at Boeing or some other large company that used to offer them, but no longer does?

Labor markets are competitive, and I think that if you had a company that was willing to do so, you'd find a lot of employees who are attracted to that model, and they say, ‘Company A has a pension. I'll go there because I really want that.’ I think a company leader might just do it, and if they do so, they're going to be taking the good employees from Company B and others, and companies may have to follow suit.

It seems to me that workers are looking for a sense of security, that there's something they'll be able to rely on in their retirement. What is the answer to that, because it's not just people who work at Boeing who are thinking about this?

Right. Let's go to Maslow's hierarchy of needs. Pensions don't actually have a line item on it, but it's the sense of security, of knowing that you have what you need in your retirement. That's a powerful factor that influences the way a person lives. It's an underserved topic to be fair. There are people very interested in this, and the fact of the matter is a lot of people think they can just sort of contribute later in life to their 401(k), because there's a lot of flexibility to invest a little or a lot. And as it turns out, most people don't invest enough, and the monies they do invest, they don't necessarily do it as well as they should.

Is there a larger societal conversation that needs to be had?

Yeah, as a societal conversation, I think choice is what we really need. Choice tends to work. I'm a finance professor. I'm a believer in markets. They work. I think if a company were to offer this, I think they might attract the type of employees they want to attract. Now, they may also be risk averse employees who simply want to be able to retire and aren't that concerned with working, so maybe it would have adverse effects. But societally, I think that we should have more pensions. It's sad to see them go.

Is there anything that you think we need to add or that we missed out on?

It’s interesting that Boeing had a pension roughly a decade ago, and they've moved away from it, and now there is a group of employees saying, gee, I want to go back to the old way.

What do you take from that?

I take it that there's a realization among many of those employees in the union that there is some benefit to having a pension plan, and that a lot of the union members probably want it. It's just difficult. The biggest issue is that while there are pension guarantees outside of the companies themselves-- for example, if a company goes bankrupt, there is a pension guarantee company that, in many cases, will take care of the pensions-- the idea is that if the company is still in business, they are the ones guaranteeing the pension. And the idea is, if you look at the pension world in general, especially, let's say state and local and community plans and counties and teachers, etc., many of those plans, most of those plans, are underfunded, and it's on the hook of the younger generation of employees to fund those pensions.

So, it's a difficult situation. That's why companies have gone away from it. They don't want to have to guarantee pensions, and they don't want to have to administer it. It's expensive. You have to have an investment staff at a company that manages a pension. Whereas, with a 401(k) or a defined contribution plan, you can “outsource it.” There still has to be staff internally to help make the contributions go to the right place, administer it for employees, etc., but investment choices and options and all of that is all done by a company like a Fidelity or a Vanguard, or one of the others. And they do a good job. This is what they do. They manage it for perhaps 10s of 1000s of companies, and they share the cost of doing so over 10s of 1000s of companies. Unfortunately, no guarantee.

This is why, if you look at a company that offers a pension, especially if it's a public company, you have the ability to look and see how well funded it is. If you see a company's pension that is 50 or 60 or 70% funded, that's an issue. That means that the underfunding has to be paid for by employees that are still working and still contributing.

The analogy here is looking at the social security system. Social Security, we all have some sort of a guaranteed income, those of us who contributed, or those eligible. Unfortunately, the Social Security system doesn't have all the dollars that I or you or anyone else has contributed through the years invested in a portfolio. We fund it each year basically by tax dollars.

If you recall, years back, Al Gore talked about putting all the Social Security money into a lock box and, in essence, not allowing politicians to use it for something else. It was interesting and nice, but it never worked out.

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