RIP Pension Plans

If you’re a baby boomer you’ve heard of the pension but if you’ve entered the workforce in the past 10 years, there’s a better than average chance that you only know of pension plans because of something you read. The amount of pension plans are down by about two thirds since their high and although there appear to be some corporate games being played if you believe this recent Forbes article, there is another reason.

As the baby boomer population retires and the life expectancy of those retires increases, the cost to these pension plans go higher. Add to that the fact that companies offering these pension plans have downsized, there are now fewer current employees paying in to the fund. As the funds incurs more payouts, there are fewer contributions.

Types of Plans

Pension plans can be broken up in to two main types: Defined benefit plans and defined contribution plans. A defined benefit plan is one where the employee contributes nothing or next to nothing. The employer guarantees the employee a certain amount per month based on a number of factors.

The defined contribution plan is what we know as a 401(k) or 403(b) plan if you work for a non-profit. The employee is required to contribute to this plan and often the employee matches a portion of it.

According to the Department of Labor, defined benefit plans have to pay you what you’ve already accumulated, employers are finding all kinds of ways to reduce payouts or eliminate them all together. Not only are pension plans in the private sector being cut but even the military is facing scrutiny as well.

If you have a pension plan, here are a few items of note:

What you Have is Safe

Whatever you have accumulated to date through the pension plan is safe. This is a federal law.

How about the Future?

Public and private institutions are permitted to change future payouts as they see fit. Union agreements may prohibit the company from changing future payouts until a new agreement is reached but some laws allow union agreements to be nullified.

Retiree Health Benefits

You shouldn’t count on having company sponsored health insurance once you retire. There’s nothing that binds a company to this promise and in fact, many companies have already cut it.

How should I treat my pension?

You should treat it like any other promise for the future: Hopefully it works out but if it doesn’t, you’re prepared.

What Should I do?

As early as you can, start an IRA and contribute as much as you can up to the maximum amount per year. IRA funds appreciate tax free until you start taking payouts and you can invest this money in a variety of different ways. This is your money and you have control over it. If the pension doesn’t work out, you have the IRA to fall back on.

Rest in peace pension plans. Don’t expect these plans to return in your lifetime and if you have one now, as depressing as it sounds, don’t count on it. The laws governing pensions could change drastically over the course of your career. Always have a backup plan.

Written by Tom

Tom Drake writes for Stupid Cents and Canadian Finance Blog. Whenever he's not working on his online endeavors, he's either doing his "real job" as a financial analyst or spending time with his wife and two boys.

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