What Happened to Pensions?
What Happened to Pensions?
There was a time when pensions, also known as defined benefit plans, were common. There was something else that was common during those years: workers staying with one company for their entire career. Combine that with shorter life expectancies, and you have a formula where pensions actually made sense.
Imagine someone in the 1950’s working in a steel mill until they were 65. At that point in time, it was reasonable for them to only live until age 70. That’s only 5 years of retirement that the company needed to fund. This is in stark contrast to the 20-30 year retirements that are common now.
As of 2023, only 15% of private industry workers have access to a Pension plan: https://www.bls.gov/opub/ted/2024/15-percent-of-private-industry-workers-had-access-to-a-defined-benefit-retirement-plan.htm, and this number will likely continue to decrease. A pension for life may sound like a dream come true, but pensions have many downsides as well:
Many were very restrictive in their participation requirements, sometimes requiring 30 years at the company before any benefits would be applicable
Restrictive vesting rules were also common, often requiring the worker to be at least 60 years old before any vesting occurred, which created a high-risk situation for the worker if they had to leave the company or were terminated before they hit the vesting age.
Limited availability was another problem. Although larger companies offered it, many small companies did not
Funding risk. Many companies simply didn’t fund their pension fund as needed to fully pay out benefits, and there wasn’t much the retired employees could do about it
Lastly, there was always the risk a company could go bankrupt, and good luck collecting a pension benefit from a bankrupt company.
Many look back at the pension with nostalgia, as if the retirement plans of today don’t compare. The idea of income for life sounds good in theory, but when you consider all the risks and limitations described above, it puts the pension in its proper context. In today’s world where workers often change companies several times throughout their career, it makes far more sense to have a defined contribution plan, like a 401(k), where you have an account in your name that you have control over and can take with you.
The downside of a 401(k)? It puts more onus on you to choose the investments within it, and determine how much you need to contribute to it in order to create the financial independence you desire.
Of course, that is where a financial planner comes in.
Call, text or email me if you or someone you know is in need of retirement planning.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
