Employer-provided pensions play an important role in assuring a comfortable retirement. In 1992, they accounted for about 20 percent of the total wealth of middle-income households aged 51-61, second only to Social Security. However, many workers still lack pension coverage. After increasing sharply in the post-World War II period, the percentage of the private sector workforce covered by an employer-sponsored pension plan at any given point in time has remained around 50 percent since the 1970s. This constancy obscures two major changes, however. First, pension coverage has increased for women and declined for men, primarily reflecting the increased earnings and labor force participation of women and a decline for men in union membership and employment in large manufacturing firms. Second, a major shift has occurred in the types of plans from defined benefit to defined contribution. Defined benefit plans generally provide retired workers with a set amount based on their salary history, while benefits under defined contribution plans depend on the accumulated amount in a worker's account. The shift to defined contribution plans reflects employment trends as well as conversion of plans. Whereas only about half the workforce is covered at a given point, pension coverage is more extensive when considered over workers' lifetimes and on a household basis. In addition, the length of time workers must be employed to become eligible for benefits -known as the vesting period- has declined, meaning that more plan participants are assured of receiving benefits. On the other hand, pensions are more important for high-income than for low-income workers. This would not be a problem if Social Security alone allowed those at the low end of the income scale to maintain their living standards in retirement, but it does not. All workers need more than Social Security for a comfortable retirement. The primary challenge for those interested in retirement security is to expand coverage so that more workers have enough income in retirement to avoid sharp drops in their living standards. About one-quarter of those without coverage are employed in firms where the employer sponsors a plan. Within this group, the main reasons for lack of coverage are that workers do not meet the age, service, or number of work hours required. Another significant reason is that workers who are covered by a 401(k) plan choose not to participate. The other three-quarters of those without a pension work for employers who do not sponsor a plan. Smaller firms are the most likely not to offer plans, and the main reasons they cite are related to the nature of their workforce (e.g., high employee turnover, a preference for cash wages) rather than the cost and administrative burden of offering a plan. Since private pensions can provide an important source of retirement income, employers and policymakers should be concerned with finding innovative approaches to expand coverage and boost employee participation.
