Business and Finance

 by: Morty Fied

A major U.S. corporation recently announced they were discontinuing their defined benefit pension plan after 2007 and will beef-up their existing 401k, which was implemented in 2005. There are half as many corporations offering defined benefit pension plans today as there were ten years ago. Why?

When we retire there will be three sources of retirement income: company pension plans, social security, and individual savings…and real estate if you were lucky enough to have bought in the past ten years. Pension plans were designed to attract top notch employees and maintain long term employment. Social Security was created to supplement individuals retirement income -- not be the sole source, however, many people don’t realize that fact. In addition, according to some estimates, Social Security may not even be available for future generations. The U.S. government is considering changing Social Security into a glorified 401k, which is what corporations are doing. This will take much of the risk off the institutions and place it on the individual. I, for one, would prefer to have a say where my Social Security contributions are invested -- maybe even in the Dart Board Fund…lol -- but personal choice in the allocation of my Social Security may never come to fruition, so we need to max out our 401k contributions and increase our personal savings rate, which, by the way, is in the negative! (http://www.bea.gov/briefrm/saving.htm). Can you believe it? A negative savings rate!

Anyway, this topic brought about a heated discussion with a very dear friend of mine. He voiced his displeasure at how “lucky” government employees (federal, teachers, armed forces) are to be able to work for twenty or thirty years, retire at whatever age they are after those years, begin receiving pension payments while he will have to work into his sixties, and personally contribute to his plan. He stated how the portion of his taxes that is allocated to fund a teacher’s retirement plan keeps increasing annually. His point was, “why should he be paying for someone else’s retirement plan when they’re not contributing to his?”

Correct me if I’m wrong, but don’t municipalities work like corporations when it comes to pension plans? A corporation funds their plans with revenues from the sale of products or services it creates and sells. A municipality collects taxes (revenues) from the residents that live within its borders who are users of the services (products) the city provides. Sure, if you don’t have any children, I guess you are paying for the schools which your neighbor sends his children to, right? Is that how it works?

My knowledge of government pensions is fuzzy – though I do remember that one of the most generous pension plans was for railroad retirees – so please feel free to comment on advantages/disadvantages regarding government pensions and enlighten us with any details you’d like to afford.

- Morty

Defined Benefit Pension Plans…reloaded.

I was reading about pension plans again and found this tidbit that I was unaware of, which surprises me due to my supposed extensive knowledge of pensions from my previous life in the financial services industry.

There is a federal government agency, the Pension Benefit Guaranty Corp (PBGC), that is an insurer of corporate pension plans, i.e. companies pay a premium to PBGC to insure their pension plans -- the more risky the company, the higher the premium. In turn, the PBGC guarantees pension payments to retirees of companies that dump their plans on them, however, as large companies like United Air Lines (parent: UAL) transfer the burden onto PBGC, the more in the red PBGC becomes and we all know what that means, right? PBGC will have to raise premiums, which could lead more and more companies depositing their liabilities on PBGC, which could lead to the government bailing out the agency and doing it with a tax increase paid by you and I.

So, like mentioned in the 01/08 blog, not only will my friend continue paying for the pensions of his local teachers union, he will undoubtedly be paying for the pensions paid to the retirees of the companies that rely on PBGC.

Have a memorable day,

-Morty

p.s. England recently installed a safety net program, similar to our Guaranty Pension Trust, called the Pension Protection Fund (PPF), to save failing pension plans, but premiums have already doubled in the two years since inception. For more detail on foreign programs, go to http://www.ssa.gov/policy/docs/progdesc/intl_update/ and click on PDF under the 'Table of Contents'.