Pensions / by kevin murray

What happened to pensions in the private sector which by 1960 covered nearly30% of all private employees?  They have primarily been replaced by Social Security and the 401(k) but that's not been a real good deal for employees.  Pensions are defined benefit plans with very specific rules and payments in which your employer makes a commitment to make those payments to you based on your length of service, salary, and some other miscellaneous factors.  Not only is this something that is specific but it is also definable, consistent, and understandable.


So presently we find that while payments from Social Security use a fairly straightforward formula, one's 401K is completely in the employee's hands.  You can contribute nothing or up to the legal maximum towards your 401K but in absence of any employer matching of your 401K, that contribution is essentially you saving money from your salary.  If your employer matches your 401K contribution it is often worth your while to try to maximize this contribution by contributing the maximum that you are allowed to put into your 401K in which you are receiving the same amount of monies from your employer as matching funds.  These matching funds are essentially the only monies that you will directly receive from your employer as part of your "retirement" benefit and your employer contribution will fall far short of providing you the type of financial benefits that you would have previously received under a valid and more preferred pension.


Perhaps one significant reason that pensions fell out of favor with corporations is that they found that their overall commitment to employees was no longer sustainable and in lieu of employee benefit plans they moved onto stock options, incentive bonuses, and the like in which the employer can maintain better control of the overall compensation and cost to the corporation.  Also, corporations wanted to maintain flexibility, durability and sustainability in which it was perceived that pension commitments took away from those options. Additionally, stock options and incentive bonuses were met with approval and appeal to the "I want it all right now" mentality in which employees are ensnared into a belief that with just the right moves at just the right time that they too can make a lot of money in a hurry, so why worry about tomorrow.


The employees that are benefiting most from pensions in today's world are government employees.  In particular, civil servants are not only able to earn wages that are comparable or typically higher than the private sector, they also have better job protection, and far superior defined benefit plans.  This hardly makes them servants in the true sense of the word as their overall pay package and benefits are simply superior on average to the private sector.  However, certain government pensions in numerous cities, counties, and some states have come under increasing strain in not being able to stay solvent or are running huge deficits to their pension commitments and payments.


Solvent pensions work best in cities in which there is a broad-base tax base, cities that are growing in both population and employment, and cities that are fiscally conservative.  Pensions do not work well in cities that are losing population and employment, suffering from a recession, or negative changes in their tax base, and cities fare poorly that have made fiscally unsound decisions based on pie-in-the-sky projections or worst.  In those types of situations, those that have counted on their pensions may just find how insecure their pensions are and suffer the consequences at an age in which they are effectively unemployable and on their own.