Pensions ... The Myth and the Reality ... There Is No Money Tree ... More money Must Be Set Aside from Current Earnings

Guaranteed pension benefits are what employees value most these days, according to a new survey.

While the idea of a guaranteed monthly income at retirement is quite appealing, of course, in the future it's not going to happen for many retirees.

In fact, for many of those who retired in earlier times it didn't happen then either. Pensions aren't "portable," for one thing, and vesting periods used to be longer in many cases as well. Thus, in the past people often retired from employers who had pension plans, but had no earned pension benefit after decades of working.

{NOTE: Portability means owning and transferring the earned pension benefit with us when we change employers and vesting periods mean how long we have to work for one employer to be guaranteed a pension benefit by that employer upon retirement. Thus, if a fifteen year employment period were required before the otherwise earned pension became guaranteed or vested, people changing employers prior to working for that employer for fifteen years earned a zero pension benefit for time worked. Each time the person changed employers, the vesting clock began running all over again. Hence, lots of people retired after working for several employers over forty years with no or very small earned pensions at the end of employment.}

Pensions not a panacea has the story:

"What do employees lust after most these days? A fat bonus? A bigger salary? Extra time off? According to one new study, a surprising number covet something their parents might well have taken for granted: A pension plan.

The survey, released earlier this month, was conducted by benefits consulting firm Towers Watson, largely as an effort to help companies understand how to attract and motivate workers.

In several head-to-head questions, researchers asked whether workers would prefer it if their employers offered them a guaranteed retirement benefit (essentially a pension) or other perks. A large plurality – 49% — chose the pension over the opportunity to earn a bigger bonus. (Just 26% picked the bonuses, while the rest didn’t express a preference.) The pension also beat out paid vacation and a better chance at a promotion by similar margins. Guaranteed retirement income was also more popular than bigger salary hikes, although there the outcome was a closer 38% to 33%.

In some ways the numbers shouldn’t come as a big shock. In the wake of the financial crisis, many employees have turned risk-averse, according to Tower Watson Senior Retirement Consultant David Speier. “They’re more concerned about security,” he says.

But the result doesn’t necessarily speak well for the state of America’s retirement system. A generation ago, pension plans were offered to more than four out of five private-sector workers; today it’s fewer than one in three. Pensions have largely been replaced by defined contribution retirement plans like 401(k)s, which were hammered along with stock and bond prices during the financial crisis.

Of course, many government employees can still count on pensions. Speier says they’ve also lingered among private companies in sectors like utilities and energy where traditional industrial concerns have remained financially healthy. While that’s good news for workers in those sectors, other employers probably aren’t going to bring pensions back despite their popularity. Executives see the commitments as just too risky and expensive. “For the same reason employees want them, employers don’t want to offer them,” Speier says.

There’s also some evidence workers may be looking at the past with rose colored glasses.... In 1980, payments from private pension plans accounted for only about 8% of retirees’ overall income, compared to 53% for social security. (The rest came from other sources, ranging from other forms of government help to dividends on stocks.) . . .

 While many workers had access to pension plans thirty years ago, many failed to collect full benefits because of various factors. Switching jobs, for example, tended to reduce employees’ standing under formulas plans used to calculate payouts. The government moved to fix these problems with new laws in the 1970s and ‘80s, but by then the move to 401(k)-type plans was already underway.

“There’s a persistent misconception that there once existed a time when private sector workers typically retired with full pension benefits,” says ICI senior economist Peter Brady. “Many actually received little or nothing.”"

Summing Up 

We have insufficient funds to pay pensions to everybody without negatively impacting wages and consumer spending, thereby further weakening future economic growth in a big way. And as we know, current economic growth is already quite feeble and will probably remain so for the foreseeable future.

In simple language, we haven't been and currently aren't saving enough for retirement, regardless of whether it's Social Security, pension plan funding or 401(k) contributions. There is no money tree.

So while we all may want guaranteed retirement benefits, someone during our working years has to set aside sufficient funds to pay those benefits. Either through Social Security contributions or employer pension funding (or even funding employee directed 401(k) funds). 

And that's true whether we're dealing with public or private sector employees and whether it's government or privately provided retirement benefits.

To repeat, as a society we aren't saving and investing enough of current earnings to provide adequate retirement benefits. 

That has to change. Period.

Thanks. Bob.