30 years ago pretty much everyone retired with a pension. It didn’t matter if they were a private business or a government worker. Everyone had something. Sure, the government or civil servants had more, but they earned less. This new recession we’re in has caused a new problem. These past 30 years private companies have been shifting away from the burden of a pension. Look at the problems caused by UAW pensions for the Big 3.
Pensions are a non-sustainable business model. That is unless people either get a smaller pension, are forced to save more, or are forced to wait longer to draw on their pensions. The idea of pension of course is you pay a set amount or none at all into a system and are able to draw money monthly for the rest of your life. Sounds great? Well a $40k pension requries $1 million in the plan per individual.
So what’s the question? Well my friend who works for the state of California is currently stuck with a 10% paycut. Unfortunately she’ll have this paycut until 2011! At least she has a job right? Wrong. She’ll find out in July if she does or doesn’t and already was given her red slip, to give her 120 days notice of termination. She asked the question, what happened to the job security promised that if you were a civil servant worker?
She asked me, is it really worth it for her to continue working for the state? It appears her promised pension benefits are in jeopardy. And if she works for 10 years and then is terminated, what happens then? The problem/question facing people in their 20s and 30s, is it worth working for a pension?
Should the promise of a pension or health benefits in retirement be weighted in your decision to accept a job? Or to stay in a job? Should you be looking for the most satisfying or highest paying jobs instead? That way you can save more or be happier?
Previously many civil servants would say they were working for a purpose. That they were working for their retirement. With that retirement in jeopardy, should it even be considered when accepting a position?
Honestly I don’t know. I think it depends on if you are single, married, with or without children. I also think that if you are a couple, it depends on the jobs of the people in the relationship. And it depends whether you are solely counting on a pension for retirement or if it’s icing on the cake.
My one caveat, I doubt they’ll ever cut the retirement benefits of the military. So that might be the only safe haven, but I could be wrong.
17 responses so far ↓
1 Inkstain // May 28, 2009 at 10:49 am
Honestly, I wouldn’t count on any pension these days. Money up front is much more reliable.
2 JoeP // May 28, 2009 at 11:50 am
I don’t see how a pension can ever be sustainable. For a given company or government agency, the number of living retirees increases every year, and the associated costs for those people increases as well. An business forced to operate with this kind of expense is very limited in what it can and can’t do to stay afloat, let alone competitive.
Personally, I would not bank on a pension, even if it was guaranteed in writing. Maybe it is my generation, but I feel people should be responsible for their own retirement. It is unfortunate that health care has gotten so expensive, yet still continues to get paid for.
3 LAL // May 28, 2009 at 12:11 pm
I think military is guaranteed. Will they get it? Yes. All of it? I don’t know.
4 bogart // May 28, 2009 at 3:39 pm
Great question and one DH and I have wrestled with personally. He stayed in a job to maximize pension benefits when we might have moved for my career. At that point he was about 8 years from retirement in a 30-and-out system that replaces 55% of salary (basically) and provides retirees (and their families) the same health-care benefits as for employees. Had we not also liked the area, we might have moved. As it was, we stayed.
I’m cautiously hopeful his pension will endure. Health insurance I’m less optimistic about (though I do still hope). I’d certainly do what I could to max out a 403B if I were starting a job for his employer (our state government, not, however, CA!) now.
The flexibility and portability of 403Bs strikes me as much better (than pensions), if you use them (i.e. contribute enough) …
5 bogart // May 28, 2009 at 7:28 pm
You know, though, you write …
“Pensions are a non-sustainable business model.” You then go on to qualify it. Pensions as they currently exist certainly are non-sustainable — built on unrealistic assumptions about life expectancy, etc. But to pick up on a point you make slightly later in the same paragraph, “The idea of pension … is you pay a set amount … into a system and are able to draw money monthly for the rest of your life.” Well, yes. But so, basically, is a 401K or a 403B. Or an annuity. I mean, in a pension system, the amount is set by a formula, and you pay it or your employer does. The same is basically true of a 401K/403B except that you have a lot more control of how much you contribute (and often that determines your employer’s contribution). An annuity (the type I’m thinking of) is generally just a single lump-sum purchase.
The big difference between a pension system and the others is that with a pension, you have shared risk. It strikes me as in many ways unfortunate that we’ve moved away from this … sure, you need $1 million to generate $40K in income, but the same is true of a 401K — or worse … because you’re looking at just one person rather than a group of people. When spread over a group, it’s easier to estimate average life expectancy, etc., with some accuracy … each individual, on the other hand, may vary wildly from the mean. So by pooling resources we can use a smaller amount of principal (per person) to provide larger payoffs (on average).
On the other hand, if estimates (e.g. average life expectancy) are way off for the whole group, then that has a huge impact, because each person has an effect on the extent to which the pension system’s resources are — or aren’t — adequate. And that’s pretty much the problem today.
But 401Ks are no different except that they are individual-level rather than grouped. The goal as most people see them is still to generate a guaranteed income for life — however long that may be.
6 LAL // May 28, 2009 at 7:30 pm
Bogart, what makes you think they won’t take away the medical benefits after retirement? It can happen.
7 LAL // May 28, 2009 at 7:34 pm
Sorry for the miswrite. For a pension you might save $200k like my mom for 35 years. But she’ll run through that in less than 5 years of retirement. Then she’ll have to live off the state.
How can pensions be a sustainable model?
8 bogart // May 28, 2009 at 10:59 pm
Either pensions or personal accounts can be sustainable … enough needs to go in to cover the expenses that come out the other end. I agree that most pensions don’t come near that (as far as I can tell), but the basic idea is sound …
Suppose (for the sake of an example) that a person saving through a 401K needs to save 15% of their gross for 35 years in order to have a secure retirement. Obviously this is based on expectations about their expenses in retirement, their longevity, and their investment returns, but it’s not far off what’s typically recommended.
The same works for pensions. Instead of 1 person, take a pool of people each depositing the same 15% in a pool. It’s invested just as the 401K would be (same return, etc.) and expected to generate the same level of income in retirement as the 401K would. What’s the difference?
Actually the pension comes out ahead if it’s structured so that some people don’t vest (but contribute … and lose those contributions), and others die before collecting.
Now … if the assumptions underpinning the 401K decisions were wrong, then the individual whose account it is pays the cost. But if the assumptions underpinning the pension suffer from the same problem … i.e. too little was contributed to cover payouts (which sounds like it’s true in your mom’s case), investment returns were too low, or you live “too long,” then “the system” pays the price (or fails). Still, the basic system/structure/idea is OK.
And I don’t actually assume we won’t lose the health care benefits associated with my DH’s pension. Hope, yes, assume, no.
9 chris // May 28, 2009 at 11:50 pm
bogart: You’re leaving out one important aspect of your “argument”.
Pensions were managed by professional money people. People trained to make sound investment choices. Choices that gave enough growth without taking on too much risk.
401-ks and its other retirement brothers and sisters are managed by individual investors. The workers making the contributions along with the matches of their employers, if any.
But if the professional money people running the pensions could not navigate the investment minefield well enough to ensure solvency for the individual workers under their programs, then how can it be expected that a novice individual worker/investor can do the same and even better?
10 bogart // May 29, 2009 at 12:10 am
Chris,
Yes, I am, indeed. Conversely, we’re leaving out a downside to the traditional pension system (as it’s been structured in the U.S.), which is that only those who work full-time (also true for 401Ks), for particular employers (ditto), and for a very long time (much less true of 401Ks) get a pension.
Still, my basic point stands … we can save, invest, and spend as individuals or as a group. Either system works if structured appropriately. Neither does if not. The latter spreads risk, which I consider an advantage.
Determining that pensions “don’t work” because they’ve been badly structured (too little paid in, too much paid out) would be like saying 401Ks don’t work because people don’t invest in them — it’s basically the same phenomenon, although who gets to make which decisions varies across the 2 structures.
11 TStrump // May 29, 2009 at 1:20 am
Here in BC, Canada, where I live, we have some pretty rich pensions for some of the civil servants.
Talk about not-sustainable … but, I guess they can keep raising taxes and cutting services to help fun them, if the money starts to run out.
12 Meg // May 30, 2009 at 7:15 pm
Company sponsored pensions & health insurance, both going the way of the dodo. Maybe it’s for the best — if we can get better private or government funded alternatives out of it. Personally, I don’t like the idea of my health insurance or retirement being tied to my job.
13 fengshui // Jun 1, 2009 at 9:51 pm
Why would your mom go through $200k in 5 years? That is a great deal of $$, even today…. ?
14 Meg from FruWiki // Jun 2, 2009 at 12:50 am
@fengshui
Well, that’s $40k a year. I won’t say *only* $40k a year — because that is still a good bit, especially if you have your house paid off by retirement and don’t have work expenses. However, that would seem like very little for a lot of people used to a certain lifestyle and/or living in a place that has a high cost of living — not to mention that many people have plans of traveling when they retire, and that can definitely take some money. And if you retire with debt then you may be in serious trouble on that much. Plus, what will $40k a year pay for 5-10-30 yrs from now?
15 LAL // Jun 3, 2009 at 10:41 pm
Bogart, a HUGE reason pensions haven’t been sustainable is because people are living longer than expected. Like SS. People would die in their late 60s/early 70s. Now it’s like 80.
Thus the years that people were “expected” to draw on a pension were far underestimated it seems. Thus maybe the amount going in was enough years ago when people lived a lot shorter. But not anymore.
Tstrump, don’t you pay a lot in taxes for the pensions? Don’t get me wrong, I checked out the highest brackets in Canada are not as high as the US, but that US you have to be making a lot more to hit that level!
Fengshui and Meg, it’s that my mom “saved” $200k from working and her contributions. She gets $50k/year distributed to her pension or $4k/month! Thus in 4 years she’ll run through her contributions and then live off of taxpayers monies.
Thus why pensions are not sustainable.
16 Meg // Jun 4, 2009 at 12:22 pm
“Bogart, a HUGE reason pensions haven’t been sustainable is because people are living longer than expected. Like SS. People would die in their late 60s/early 70s. Now it’s like 80.”
*Puts on her conspiracy theorist cap*
Maybe that’s why they’re subsidizing corn (and therefore fast food), spreading GMOs, and poisoning us with BPA.
But seriously, not sure that our generation will live longer than the baby boomers
Sooooo many people with diabetes, heart disease, cancer, etc. It really takes a toll.
17 LAL // Jun 4, 2009 at 9:57 pm
Meg, nah, that’s from overeating period. People now have tons of convenience foods period. Not just fast foods.
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