July 2025 Finance Ideas
I’m sure you’ve heard about the problem our country faces with “Social Security, corporate pensions, state pensions, county pensions, municipal pensions…virtually all defined benefit pensions.” The responsibility of saving for retirement has been and continues to shift from employers to their employees. This is a must read. I’ll call soon to get your thoughts.
OUR COUNTRY’S PENSION CRISIS IN A NUTSHELL – Pension plans that promise a specific benefit in the future are essentially a contract between current and future generations, and those future generations aren’t represented at the bargaining table. As a result, they get stuck guaranteeing the retirement income of their elders while receiving nothing in return. This is the case for Social Security, corporate pensions, state pensions, county pensions, municipal pensions…virtually all defined benefit pensions!
THE PENSION FREEZE – When a company freezes its pension plan, it freezes benefits at their current level, meaning that employees no longer build up higher retirement benefits to reflect higher pay and additional years of employment. Companies generally then offer only a 401(k) plan in the future, to which employees must contribute.
Brief history – The corporate pension has been around since the 19th century, but really came into its own in the U.S. in the years just after World War II. The defined benefit plans assumed lifetime jobs with a company, which seemed reasonable at the time, but has long since ceased being the American norm.
Why is it happening? – Companies are trying to become more competitive and adapt to changing times. They must compete with younger companies that never made pension promises or foreign companies where the government provides retirement benefits or there are no benefits at all. IBM, with one of the nation’s largest corporate pension funds, announced a pension freeze in 2006 and many more major corporations have followed suit over the intervening years.
Why a freeze? – Pension crises at major corporations brought the issue to a head, but arcane accounting rules and low, long-term interest rates mean the accounting benefit for freezing a pension is higher than it would be if long-term rates rise. Companies prefer the more predictable cost structure of 401(k) plans.
Who’s most vulnerable? – Salaried employees since companies have to negotiate to cut benefits for workers covered by collective bargaining.
What about earned benefits? – Companies can’t cut pension benefits already earned, but the earned benefits in a “frozen” defined benefit plan may be a lot less than expected.
Who gets hurt the most? – Workers in their 40s and 50s who have been at a company for many years. Benefits build up fastest in an employee’s final years at a company…50% of a person’s pension may be earned in the last five years on the job. Even with bigger 401(k) contributions, these workers may never catch up.
Who isn’t hurt? – Current retirees, younger workers and those who switch jobs frequently.
Freezing versus terminating – Freezing locks the pension in place where it currently stands actuarially and the company is obligated to pay the currently earned benefit in the future. When employers terminate a pension, they must pay out all of the benefits immediately, either in lump sums or by buying each worker an annuity. Most terminations are due to bankruptcy.
WHO IS AT RISK? – Virtually anyone who hopes to retire one day. Individuals must take control of their “retirement plane” in order to safely land at retirement with sufficient assets and income to support their desired standard of living.
