# Why are pension plans blamed for gov and private company's problems? **URL:** \ **Category:** Factual Questions\ **Created:** [December 11, 2012, 5:39pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719 "2012-12-11T17:39:04Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![aceplace57](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/aceplace57/32/3500_2.png) [@aceplace57](https://boards.straightdope.com/u/aceplace57)\ **Post date:** [December 11, 2012, 5:39pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/1 "2012-12-11T17:39:04Z")
It seems like pensions plans are always mentioned as the excuse for various companies financial problems and even gov woes. I know they were mentioned during the car industry bailout. Hostess claims pension plans are at least part of the reason for their bankruptcy proceedings. Even gov is using them and other benefits as their excuse. I can’t believe leave payouts are blamed. Vacation leave has always been paid to employees when they terminate. Thats why leave balances are capped. I can only carry 300 hours on the books. I either use the excess or lose it. [http://www.bloomberg.com/news/2012-12-11/-822-000-worker-shows-california-leads-u-s-pay-giveaway.html](http://www.bloomberg.com/news/2012-12-11/-822-000-worker-shows-california-leads-u-s-pay-giveaway.html) Aren’t pension plans protected in separate accounts and managed by groups like TIAA/CREF, Fidelity and other groups? As I understand it, pensions aren’t some vague promise to pay an employee thirty years from now. I know my payroll check stub shows my retirement deduction and my employers contribution. The percentages haven’t changed throughout my 25 year career… My employer contributes a basic 5% to every benefits eligible employee. There’s another matching percent that caps at 10% total. I contribute nothing then, I get the basic 5%. I contribute 7% then my employer contributes 7%. Me - 10% Employer 10% and thats the most they will match. TIAA/CREF invests the pension plan money. I took a hit in 2008-2010 but its steadily climbing back up. So why are companies claiming pensions are such a huge burden? Why are they saying that the Hostess employees will lose their pensions? Isn’t that money safely held by a third party management/investment company (like TIAA/CREF or Fidelity) somewhere? Can someone explain how pension plans are a problem for companies? ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [December 11, 2012, 5:48pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/2 "2012-12-11T17:48:17Z")
I’m no expert but I think there are two types of retirement plans; defined benefit and defined contribution. A 401(k) is a defined contribution plan. The employee contributes some money and the employer may match some of that money. The amount of money available to the employee upon retirement is dependent on how much the employee contributes, which investments are made and how the market performs. In a defined benefit plan, the employer or pension provider guarantees how much money the employee will receive at retirement and is responsible for making up any shortfall. In recent decades, many governments and some companies have not contributed enough money to their defined benefit employee pension plans, and so are now seeing a massive deficit in what they need to pay out. ---
**Author:** ![Leaffan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/leaffan/32/299_2.png) [@Leaffan](https://boards.straightdope.com/u/Leaffan)\ **Post date:** [December 11, 2012, 5:49pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/3 "2012-12-11T17:49:55Z")
What you have is a defined contribution plan. You can actually see a statement showing how much money you have put aside. What is hitting car companies and governments is defined benefit plans. These are plans where you are provided with a monthly income after retirement based on contributions by you and your employer over the years, but as far as I know there’s no requirement for the companies to keep a separate protected bucket of money; they just agree to pay you your monthly income as calculated by years of service, age of retirement, years of contribution, and an average salary over the last X years of employment. A decade or so ago, the Canadian government raided the public service pension account in order to balance the books. I assume when companies are in a bad way they too can raid the fund thinking they can pay it back in the future, which they never seem able to do. ETA: Nija’d by **Dewey**. ---
**Author:** ![Martin\_Hyde](https://avatars.discourse-cdn.com/v4/letter/m/47e85d/32.png) [@Martin\_Hyde](https://boards.straightdope.com/u/Martin_Hyde)\ **Post date:** [December 11, 2012, 5:56pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/4 "2012-12-11T17:56:20Z")
You haven’t explained how your benefits are disbursed, so I’m not even sure you have a traditional defined benefits pension plan. There are a few different models of pension plans. As an example, I entered military service before 1980, so I was in the “Final Pay” military pension plan. The way that worked, once you had 20 years of service you could retire and receive for the rest of your days a monthly payment equal to 50% of your final paycheck’s regular pay amount. Every year in over 20 increased the payout in 2.5% of final pay increments. So if you put in 30 years, you’d retire and receive regular monthly payments equal to 75% of your final paycheck. These are then indexed to inflation, I’ve been retired for years but my payments will continue to go up as CPI increases. Now, this is a military plan essentially funded by tax revenue. But I’m familiar with some businesses that historically used a similar “percentage of final pay” system. For example the local natural gas utility in my area, while phased out now, used to have a pension program that was very similar. So where is the problem? Well, the problem is individual retirees are not receiving money only in relation to how much was contributed by them or on behalf of them. I could work fixing gas lines for 30 years and then my last year get promoted to be a supervisor and get a 40% increase in pay. Then retire. Then I live to be 95 years old. Do you see how that can cause problems for the plan? With a 401k plan or something that might be managed by Fidelity, individual participants have their own individual accounts. Generally, employer contributions are made at regular intervals throughout the employees tenure. On retirement, the employer has already paid all the money into that plan that they need to pay. There is no forecasting or anything the employer needs to do. With a defined benefit pension plan, like the military plan I described, there are no individual accounts. So my benefit will continue until I die. The military has to “guess” how long its retirees will live to forecast how much it will need to fund its pension obligations long term. Since the military is supported by non-optional taxes, that’s one thing. But private companies may have made commitments many decades ago and changing realities may mean current revenues can no longer match previous commitments, and the commitments may be larger than expected. Depending on people living longer or things of that nature. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [December 11, 2012, 5:57pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/5 "2012-12-11T17:57:36Z")
There are pension funding requirements for defined benefits plans. You can generally find them in a publicly-traded companies quarterly statements. Bad stock market performance can increase a companies pension funding burden, as they have to have a certain amount on hand. Pensions are also backed up by govt guarantees, similar to FDCI, called PBGC. It does not fully guarantee all benefits. A lot of the rules are found in [ERISA](http://en.wikipedia.org/wiki/Employee_Retirement_Income_Security_Act)and later amendments. ---
**Author:** ![DataX](https://avatars.discourse-cdn.com/v4/letter/d/e99b99/32.png) [@DataX](https://boards.straightdope.com/u/DataX)\ **Post date:** [December 11, 2012, 5:59pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/6 "2012-12-11T17:59:05Z")
I think they are supposed to be “fully funded”, but that doesn’t mean what you think it means - or at least I suspect not. They “predict” how much the stock market will do and make other assumptions. Of course, these assumptions are off - and guess which way they are off? When the market goes down - it’s basically been flat for the last 4 -5 years - so that is years that they thought they would have to make money in the stock market. Many companies are going to defined contribution. How they ever thought defined benefit made sense is beyond my understanding. ---
**Author:** ![running\_coach](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/running_coach/32/15836_2.png) [@running\_coach](https://boards.straightdope.com/u/running_coach)\ **Post date:** [December 11, 2012, 6:03pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/7 "2012-12-11T18:03:50Z")
> [@DataX](#): > > Many companies are going to defined contribution. How they ever thought defined benefit made sense is beyond my understanding. That’s why they make the big salaries and bonuses. ---
**Author:** ![Mister\_Rik](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mister_rik/32/491_2.png) [@Mister\_Rik](https://boards.straightdope.com/u/Mister_Rik)\ **Post date:** [December 11, 2012, 6:07pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/8 "2012-12-11T18:07:53Z")
Isn’t one of the problems modern lifespans as well? ISTR hearing that, when a lot of these pension/retirement plans (including Social Security) were put in place, nobody was expecting so many people would live into their eighties and nineties. A college professor of mine said that when SS was set up, they picked age 65 specifically because few people lived much past that at that time. These retirement plans expected to pay out for 5-10 years, not 25-30 years. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [December 11, 2012, 6:08pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/9 "2012-12-11T18:08:13Z")
> [@DataX](#): > > Many companies are going to defined contribution. How they ever thought defined benefit made sense is beyond my understanding. Well, it’s not really a question of what makes sense, it’s a question of what they need to do to attract talented employees. There was a time that a pension was expected, and demanded, by potential workers. That time seems to have passed. Clearly moving investment risk on to the employee is good for the employer. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [December 11, 2012, 6:09pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/10 "2012-12-11T18:09:00Z")
> [@aceplace57](#): > > I know my payroll check stub shows my retirement deduction and my employers contribution. The percentages haven’t changed throughout my 25 year career.. My employer contributes a basic 5% to every benefits eligible employee. That isn’t a traditional pension. That’s more like a 401(k). A pension is a promise that once you will _get_ X benefits when you retire. It isn’t based on any contribution. A company is required to manage its pension plan on its own. It doesn’t appear on your paycheck. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [December 11, 2012, 6:10pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/11 "2012-12-11T18:10:07Z")
> [@DataX](#): > > Many companies are going to defined contribution. How they ever thought defined benefit made sense is beyond my understanding. Because a defined contribution plan is basically a scam that in the end doesn’t really add up to much in the long term. ---
**Author:** ![Leaffan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/leaffan/32/299_2.png) [@Leaffan](https://boards.straightdope.com/u/Leaffan)\ **Post date:** [December 11, 2012, 6:11pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/12 "2012-12-11T18:11:18Z")
> [@Acsenray](#): > > That isn’t a traditional pension. That’s more like a 401(k). A pension is a promise that once you will _get_ X benefits when you retire. It isn’t based on any contribution. A company is required to manage its pension plan on its own. It doesn’t appear on your paycheck. Not necessarily true. My defined plan clearly shows on my paycheque how much I’ve contributed and how much my employer (Crown corporation of Canada) has contributed each pay and cumulative YTD. Then in January it starts all over again at zero. ---
**Author:** ![aceplace57](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/aceplace57/32/3500_2.png) [@aceplace57](https://boards.straightdope.com/u/aceplace57)\ **Post date:** [December 11, 2012, 6:11pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/13 "2012-12-11T18:11:55Z")
Forgot to mention that I have a 403(b). It’s for public & education employees. I think the private sector has a 401(k)? Similar but there’s different tax rules on how much can be tax deferred. Anyone know if the Hostess employees pension fund is held by their union? I’ve heard of unions doing that. IIRC Jimmy Hoffa went to prison for dipping into the Teamsters fund. ---
**Author:** ![Machine\_Elf](https://avatars.discourse-cdn.com/v4/letter/m/82dd89/32.png) [@Machine\_Elf](https://boards.straightdope.com/u/Machine_Elf)\ **Post date:** [December 11, 2012, 6:48pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/14 "2012-12-11T18:48:23Z")
> [@Acsenray](#): > > Because a defined contribution plan is basically a scam that in the end doesn’t really add up to much in the long term. There’s no scam; the numbers are there for everyone to see, and the money in the pot all belongs to the employee when he retires. If he is realistic in his expectations of market performance and retirement living expenses, then he knows how much he needs to contribute over the course of his career. If he chooses not to contribute an appropriate amount, he has not been scammed by anyone other than himself. ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [December 11, 2012, 6:51pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/15 "2012-12-11T18:51:58Z")
One advantage of a 401(k)-type plan is that, at least when it comes to the employee contributions, there’s no vesting period. So if you leave the company after a short time, the money comes with you. With some traditional pension plans, if you leave the company before the vesting date, you don’t get anything from the pension. ---
**Author:** ![aceplace57](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/aceplace57/32/3500_2.png) [@aceplace57](https://boards.straightdope.com/u/aceplace57)\ **Post date:** [December 11, 2012, 6:59pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/16 "2012-12-11T18:59:57Z")
I just ran across this [British article](http://www.thisismoney.co.uk/money/pensions/article-2236453/DAN-HYDE-Theres-problem-annuity-comparison-services-fixed.html) on converting a pension fund to annuity at retirement. I don’t know how well it applies to U.S. practices. I regret not paying in more early in my career. But, like most people I didn’t expect to stay at my job for long. Twenty-five years later I’m still there. I started contributing the maximum allowed under the Federal tax deferral limits 15 years ago. > [@](#): > > The advice is simple: when you retire, you absolutely MUST shop around for the best payout from your pension. > > This means scouring the insurance market for the best rate on what’s called an annuity. This is the product used by 400,000 people a year to turn their pension pot into a stream of income. > > At this life-changing moment, the worst thing to do is bury your head in the sand. If you accept the first offer on the table, you are likely to be thousands of pounds poorer in old age – with no way back. > > Why? Because the first deal dangled in front of your nose is typically a pathetic one from your existing pension provider. > > Annuity rates vary wildly at insurers such as Aviva, Canada Life, Prudential, Just Retirement and Partnership. You can boost your pension by 20 per cent by swapping from the worst standard deal to the best. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [December 11, 2012, 7:05pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/17 "2012-12-11T19:05:07Z")
I’m really confused by your mixing of terms. The notion of getting an annuity for a 403(b) doesn’t make sense to me. Nor does the idea of “maxing your contribution” to a defined-benefit pension. You would get an annuity if you take a lump-sum payment on your defined-benefit pension rather than using the annuity offered by your pension provider. ETA: I know see that historically 403(b)'s have been invested in annuities. Seems odd to me, but I’ve only been involved in 401(k). I think it’s more common to have your 403(b) in mutual funds these days. It could make sense to get an annuity when you retire for your 403(b), I suppose. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [December 11, 2012, 7:07pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/18 "2012-12-11T19:07:27Z")
> [@Acsenray](#): > > Because a defined contribution plan is basically a scam that in the end doesn’t really add up to much in the long term. That’s a load of bullshit. A 401(k) has infinitely more transparency and ability to make individual strategic investments than a defined-benefit plan does. At any time I can see exactly what’s in my account, choose my own investments, make forecasts based on publicly available historical return rates, get a nice tax deduction, and pay lower taxes when I take a distribution as an old fart. The money in my 401(k) is mine, with no connection to the company, and will be unaffected if the company goes bankrupt and I move to another employer. With an employer match, I get even more money for free. And that money is also mine, independent of the company. I would much rather have a defined-contribution plan, where the account is in my name, the money belongs to me, and I can choose its investments, then some vague promise of future benefits to be paid by a company that may not exist in 30 years. ---
**Author:** ![aceplace57](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/aceplace57/32/3500_2.png) [@aceplace57](https://boards.straightdope.com/u/aceplace57)\ **Post date:** [December 11, 2012, 7:08pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/19 "2012-12-11T19:08:39Z")
The annuity was something I saw in that British article. I don’t know if it even applies to me. I’ll get advice from a financial planner when I get closer to retirement age. Unfortunately, the tax deferal limit does apply to me. [http://www.403bwise.com/faqs/](http://www.403bwise.com/faqs/) > [@](#): > > Will participation in a defined benefit plan (pension/TRS) affect one’s ability to contribute the maximum elective deferral limit to a 403(b) plan? > No. The elective deferral limit is a taxpayer limit, meaning that your maximum contribution to all plans cannot exceed the annual limit. However, your mandatory contribution to the state defined benefit plan is not considered an elective deferral, so it doesn’t reduce your annual limit. Therefore, you are able to participate in your state’s defined benefit plan and contribute the maximum allowable to your 403(b) plan. > [@Jas09](#): > > I’m really confused by your mixing of terms. The notion of getting an annuity for a 403(b) doesn’t make sense to me. Nor does the idea of “maxing your contribution” to a defined-benefit pension. > > You would get an annuity if you take a lump-sum payment on your defined-benefit pension rather than using the annuity offered by your pension provider. > > ETA: I know see that historically 403(b)'s have been invested in annuities. Seems odd to me, but I’ve only been involved in 401(k). I think it’s more common to have your 403(b) in mutual funds these days. It could make sense to get an annuity when you retire for your 403(b), I suppose. ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [December 11, 2012, 7:09pm UTC](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719/20 "2012-12-11T19:09:54Z")
> [@Mister\_Rik](#): > > Isn’t one of the problems modern lifespans as well? ISTR hearing that, when a lot of these pension/retirement plans (including Social Security) were put in place, nobody was expecting so many people would live into their eighties and nineties. A college professor of mine said that when SS was set up, they picked age 65 specifically because few people lived much past that at that time. These retirement plans expected to pay out for 5-10 years, not 25-30 years. I disagree with your professor. When Social Security was first enacted, 65 was [chosen](http://www.ssa.gov/history/age65.html) because half of existing retirement plans used age 65. I have no cite, but suspect that the state and private retirement plans that existed in 1935 had picked age 65-70 more for the difficultly of work at that age as opposed to impending death. (This has not changed for a lot of us) Also, according to this [table](http://www.infoplease.com/ipa/A0005140.html), between 1939 (two years after the first SS payments) and 2004, life expectancy (for white males) at age 60 has gone up about 6 years, from 15 years to 21. Here is another [take](http://www.ssa.gov/history/lifeexpect.html), showing just a 2.6 year increase between 1940 and 1990. Anecdotally, my 8 great-grandparents were among the first to have been eligible for SS. Five of the six who reached retirement age ‘beat to odds’ and lived past 75. One at 66, the remaining 5 lived to 78, 78, 83, 93 and 96. [Next page](https://boards.straightdope.com/t/why-are-pension-plans-blamed-for-gov-and-private-companys-problems/643719.md?page=2)