What good is a pension?

Critics malign 401k plans; they favor the wealthy, they don’t provide guarantee income in retirement, they require employees to contribute, investment choices are poor, etc. pensions are much better.

Really?

I have a pension, it makes me financially secure. I wouldn’t trade it for anything. HOWEVER, the value of my pension is based on the fact I worked for the same employer for nearly fifty years.

Pensions deliver value based on earnings and a formula based on service with the employer. Generally, you add to your pension as the plan gives you a percentage of (average) earnings for years of service.

Now look at the statistics below from the BLS. What good is a pension when job tenure is measured in a few years, often insufficient to become vested in any benefit?

The median number of years that employees have worked for their current employer is currently 4.1 years, according to a News Release from the U.S. Bureau of Labor Statistics. However, this longevity varies by age and occupation.

  • The median tenure for workers ages 25 to 34 is 2.8 years.
  • The median tenure for employees ages 55 to 64 is 9.9 years.
  • Workers in management, professional, and related occupations had the highest median tenure (4.9 years).
  • Workers in service occupations had the lowest median tenure (1.9 years).

So, 401k plans are no good and workers don’t stay with one employer long enough to accumulate a pension even if available, what’s the solution?

10 comments

  1. I’ve worked as a part-time professor for the University of TN for nearly 27 years and have several pension options. The various options of single life and survivor annuity options depend on the life expectancy of the member and beneficiary. In general, are the options actuarially equivalent and under what assumptions? The pension has an annual inflation adjustment capped at 3%. Fortunately, my wife and I won’t need the income for living expenses and we intend to save the money for a legacy. I suspect that compounding the larger single life benefit will potentially be associated with a more generous legacy than the survivor annuity options assuming accurate life expectancies. What do you think? May be a good article for you to contrast pension options for savers vs spenders. Thank you. I enjoyed your articles and writing style on Humble Dollar.

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  2. The solution already exists. A super majority of workers has had the ability to save more than enough in an IRA since 1982; and for those who don’t have access to an employer sponsored plan, 1975. Is it a top priority? If so, what’s holding folks back?

    40+ years of contributing the max, plus investment returns, coupled with SS will allow all but the highest paid to retire at SS Full Retirement Age and maintain or even improve pre-retirement standard of living.

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      1. Most wouldn’t have to contribute the max each year. My comment was simply that contributing the maximum each year for 40 years would ensure a super majority of American workers (all but the highest paid) could annuitize those savings and, when combined with Social Security, maintain their pre-retirement standard of living.

        I have confirmed in past posts that those who lived all their life in poverty are likely not to have adequate financial wherewithal to save, and that they would likely live their retirement years in poverty as well.

        I have also confirmed that “poverty”, as defined in America, is an income rate, which excludes consideration of possessions and wealth. So, the percentage living in poverty in retirement is likely to be less than the official numbers.

        All that said, however, if a financially comfortable retirement is a priority, there is an option to achieve that result. And, no one gives a care about those whose income is so high that even participating in an IRA at the maximum would not be sufficient to maintain pre-retirement standard of living.

        Best to you. Jack

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  3. Median tenure has been less than five years for over five decades – since BLS first started measuring it.

    Multi employer plans were deliberately created so that management and labor could over promise, underfund and rely on govt/taxpayers for a bailout. Remember, multiemployer pension plan amendment act of 1980, reforming funding, was signed into law by President CARTER.

    No retirement system will work for those who do not have retirement preparation as a financial priority.

    Social Security improved benefits are a thinly veiled effort to buy votes, and send bill to those too young to vote and generations yet unborn.

    Finally, a super majority of American workers never had a traditional pension, and never will. If they were such a priority, a desired benefit, we would see contributory plans pop up across America.

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  4. Seems a bit of circular logic. The places with pensions has shrunk considerably. Workers no longer have incentive to stay at jobs that aren’t satisfying nor treating loyalty as a one way street pointed to the employer. Raises for the bulk of employees have barely kept even with inflation and workers have learned that they can goose their financial rewards by changing employers. Pensions are great if you can get them, but transportable retirement plans are a necessity. Employers gleefully ended pensions to save money, that promptly went into upper managements pockets, and now has to deal with employees who aren’t into indentured servitude and broken promises of work-life balance.

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  5. Exceptions:

    MEP union pensions (Multi Employer Pensions)
    Very good to mediocre pensions depending on the trade, many with retiree health benefits.
    Many are in the process as we speak, of being bailed out because they weren’t as tightly controlled as single company pensions. Many basically didn’t contribute enough, then were hit by market losses in 2001/2008, then suffered lower worker to retiree rates in the recession.

    Government pensions (state and local)
    Hit by some of the same problems as MEPs, as they are not regulated (or insured) by PBGC.
    Generally very good pensions, COLA adjusted (up to a limit), with retiree healthcare.*

    Not all receive the good pensions, though:
    “What good is a pension when job tenure is measured in a few years, often insufficient to become vested in any benefit?”
    Only about 20 percent of public retirees are “full career” workers. The average tenure of government workers is about 8 years; half of government workers don’t even stay long enough to vest. The wife has a county pension about enough for a good car payment. No retiree healthcare unless you have at least ten years –and– retire within one year.

    *Not all cases; “some are more equal than others”. Especially since 2008/2009, substantial cuts were made for new hires.

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  6. The solution to the retirement income problem is above my pay grade.
    I do agree with the critics of 401k plans and the IRA. I do agree that worker mobility is greater now so pensions are not vested before a worker moves on to the next job and some are contracted without benefits.
    What I believe is that some serious attention needs to be paid to tightening up the 401k problems (costs, enrollment and so on). I also believe that pensions could be tweaked in the areas of portability and vesting. There is enough brain power in the US to figure it out if there is enough concern.

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  7. Because of the very stats you cite for being tenured on a job, I think it is totally unfair the the IRS restricts individual contributions to IRAs / Roth IRA to a limit of $6000 under 50 / $7000 over age 50. While the 401K / Roth 401K limits are $20,500 / $27,000.

    Not that I believe that a service worker who is changing jobs every 1.9 years will be able to save $20K, it is not “fair” (whatever that means today) that if they work for a company that offers a 401K, they may be able to retire a millionaire. Otherwise, if they even maxed out their IRAs every year that they would be lucky to have $250-300k saved for retirement.

    For my first 20 years I was not in a position to max out my 401K. Took me several years to get all of the company match. Babies have a way of preventing that. But at the end of my career, I was able to max out my contributions. For some one who has only an IRA, maxing out at $7k at the end of their career will not make up for lost compounding from early in their career.

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    1. I agree that the difference between 401k and IRA contribution limits is not right. But what should be done is make the current 401k contribution limit be the total annual amount that can be contributed in all of one’s retirement accounts. A max of $20,500 / $27,000 saved per individual per year in pre-tax/post-tax in total. All account needs to allow Roth option. This will limit the more wealthy to from saving excessive amounts in retirement accounts and have to use taxable accounts. Taxable accounts still have the advantageous capital gains tax brackets vs the income tax brackets used for pre-tax retirement accounts.
      During my work career I never contributed the maximum allowed to my 401k, could not because of living expenses (i.e. babies, etc.). Currently trying to figure out how to minimize the tax hit, including staying under IRMAA threshold. So can retire comfortably if have the discipline to save each and every year, invest in low cost index funds and not speculate with the hot dot. One needs to learn to live below one’s means, or else will be forced to once they only have SS to live on.
      The various accounts need to be consolidated into a single set of rules to make it easier for the average person to understand and implement into their household’s savings/investments strategy. It would be great if there was only one type of retirement account, but that is probably pie in the sky thinking. What would become of all the financial advisors if that ever happened?

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