pensions

It was shortly after WW11 ended that pension plans became popular and these plans were called defined benefit plans. The name indicates that a known benefit would be provided at retirement. This means that the company had to estimate how many employees would remain with the company until retirement, their salaries at that time and estimates on how much money the pension plan would earn over the years. With all of these estimates in place the company could then determine how much money would be added to the pension each year. The government would oversee these plans to make sure that the company was putting enough money into the plan to take care of future employee needs.
Things ran fairly smooth until the late 1970’s when inflation hit double digits. This cause wages to rise faster than anticipated and many companies found their pension plans without enough money to cover future contingencies. In pension parlance these plans were “underfunded”. The government stepped in and forced these companies to add additional monies to these plans.
Over the past thirty years many municipal, county and state pensions have been raided to pay for other more pressing programs and today they are underfunded. There is no federal government oversight in this area and so most of the improper use of pension funds has gone unnoticed until recently. Each day new reports come out showing some government pension fund in trouble. These funds were not robbed but contributions to them to keep them properly funded have been curtailed and now the benefits of future retirees are in jeopardy.
I want to relate a personal experience to indicate how pensions can be abused. The city auditor in Grand Forks was a decent man, who spent 30 plus years doing a good job for the city. I proposed to him that he change the city pension investments from Aetna to Equitable. He evaluated the two plans and conceded that it would be a good move. This auditor was within one year of retiring and when Aetna heard about the plan from Equitable they changed the pension factor from 1.5 to 2.0. To explain this you need to understand how defined benefit pensions are determined. The rule is that you take the number of years you have worked with the company and multiply that by the factor and that is the percent of your final income that you will get from your pension. This person had worked there 32 years so his pension was 1.5 times 32 = 48% of his final salary which was $40,000 so his pension would be $19,200 per year. With the new pension factor his benefit would be $25,600 per year. When he saw this he decided to stay with Aetna.
Within five years of his retirement the pension fund was underfunded and the city had to raise property taxes to fund the plan. This is one small instance of which I was aware but there are likely many more cases like this.
The point is that many government plans around the country are now facing shortages and these will have to be made up by other income sources or the employees will not receive their promised benefits.
It was because of the crisis in the late 70’s that companies began to move away from defined benefit plans to 401K plans. With these plans the employee and the company add money to the plan and at retirement the employee gets whatever is in the pot. The company is not obligated to contribute and recently many companies of reduced or eliminated their contributions.