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Got to Help Yourself

Richard Quinn, 2:06 am ET

AT THE END OF EACH month, my pension arrives in my bank account. I can count on the same amount every month. It’s comforting.

In the old days, nearly 50% of working Americans had pension benefits. But it was never more than that. For most workers, the three-legged stool really only had two legs, Social Security and personal savings. Today, 76% of state and local government workers have a pension plan, versus just 12% of private sector workers. No matter how you slice it, most Americans are on their own when it comes to retirement savings.

There are several reasons traditional pensions have disappeared in the private sector. They’re expensive to fund and administer. They create large long-term liabilities for companies. Maybe most important, they only provide value to long-term employees. My pension is based on working for the same employer for nearly 50 years. That sort of tenure is highly unusual. In fact, private sector tenure of even 10 years was never common in any generation and, when it did occur, it was concentrated in large companies and certain industries, typically those that are unionized.

Given the disappearance of pensions, it’s no wonder so many retirees rely heavily on Social Security. But what’s curious is why we have a crisis when it comes to retirement savings. After all, to help those without pensions, we’ve had IRAs since 1974 and 401(k) plans since 1981. To be blunt, too many workers in the last half-century have put spending ahead of saving. And, yes, all but the poorest among us can afford to save—if we make it a priority and we make the necessary sacrifices.

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Juan Fourneau
Juan Fourneau
1 month ago

I started my job at 26 and was provided a pension until at 45 the company quit funding it. It provided a more generous 401K to offset the change. I project my pension will provide me around $850 a month. If it would have continued funding it the next 10-15 years would have provided the most generous benefits. But I’m grateful for what I have. It will be a part of my 4-5 legged stool.

Harold Tynes
Harold Tynes
1 month ago

I’ve had responsibility for several pension plans over the years. Generally, they were underappreciated by the younger employees. With seniority driven unions and reductions in force over the years, very few young employees saw this as a benefit they could enjoy as the pension benefit is back end loaded and not portable. Having a portable 401k with a good match was a win for them and the company.

R Quinn
R Quinn
1 month ago
Reply to  Harold Tynes

Absolutely. 30 + years is a long time to wait to see value and most workers don’t have that long-term view. Unfortunately, too many also can’t see the long-term view by using a 401k with discipline and patience. I think loans, hardship withdrawals and daily valuations were a collective mistake.

Newsboy
Newsboy
1 month ago

An “old-school” pension plan, from my perspective, was a tool of mandatory compliance by employers to enforce the golden rule of “paying yourself first” by their rank-an file workers, and reward longevity & loyalty by these same workers. It was also designed to protect these same employees who, (heavily influenced by the whims of a consumption-driven world) might otherwise not make the decision to invest for their future retirement needs.

Thankfully, more recent 401(k) and 403(b) plan offerings typically have (as the default option) automatic enrollment for new hires with a 3% wage deduction (typically 3% is the maximum needed to trigger an employer’s full “dollar-for-dollar” match of their funds). In my eyes, this is the modern-day equivalent of a pension. Granted, even with 6% annual pre-tax contributions, it’s still not likely enough to fill their future retirement income bucket, but neither was a traditional pension benefit in retirement (at least for most of us). It does wonders to help establish the behavior of saving, though!

Added Bonus: these tax deferred dollars are typically (by plan default) placed into a “LifeCycle” index fund, with the stock/bond % mix tied with the individual employees targeted retirement date. The internal rate of return over 30-40 years (if left alone) coupled with the dollar-cost averaging benefit of new contributions, should result in a retirement balance that will vastly outperform the IRR seen in most pension plans and government S.S. benefits. Yes, the employee is assuming all the investment risk (not the company), but also fully enjoying benefit of the better long-term returns at the end of the retirement rainbow as a reward for assuming that risk.

From my perspective (admittedly I’m a big a fan of The Who)..The kids are alright.The one caveat: Keeping today’s young workers from drawing on that retirement money for technically eligible (but sometimes short-sighted) pre-retirement disbursements.

…As Charlie Munger famously suggested: “The first rule of compounding is to never interrupt it unnecessarily.”

Last edited 1 month ago by Newsboy
R Quinn
R Quinn
1 month ago
Reply to  Newsboy

The non-contributory pension plan from which I receive a monthly check has been around since 1911. Having managed that plan myself for thirty of my fifty years with the Company, I know the plan was driven by labor negations and on occasion the self interests of top management, but mostly the unions where longevity of employment was the norm. There was never a thought about protecting workers from their consumption. Over the years I managed the plan we gave seven COLAs, but with the addition of a 401k that stopped.

Two major factors accelerated the demise of the pension, ERISA and other laws, accounting changes and fewer workers who stayed long enough to accumulate an appreciated benefit.

My pension based on nearly fifty years of service equals my base pay while working (not total compensation). That would be hard to duplicate in a 401k as an income stream.

Dan
Dan
1 month ago

That company pension plan was paid for by the employee at the end of the day. It is not different from a deferred annuity. It was a forced savings program unlike social security that relies on current Fica contributions from current workers to fund current recipients. The take away is there is no free lunch. One needs to save to fund retirement independently from your company or business.

R Quinn
R Quinn
1 month ago
Reply to  Dan

Except for employee contributory pension plans, that would only be the case if you assume that without the pension, pay would be higher for those workers. That to me is highly questionable.

Ormode
Ormode
1 month ago

Even if you’re well-off and saved a lot, you’re very likely to just leave all your money sitting in your account. A pension was just income you could spend, but most people look at savings as capital that took a long time to build up.

R Quinn
R Quinn
1 month ago
Reply to  Ormode

Sooner or later they must live on that account won’t they and then they are faced with how much to withdraw to live on, the depletion of that account and the risks of the stock market.

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