Pensions and the Lucky Few

Before the economic crisis hit, I often heard from friends and readers who were sanguine about their retirement savings plans but worried that their traditional pensions wouldn’t be there when they retired. What’s happened, of course, is that traditional plans that pay benefits for life have turned out to be much safer than other retirement savings plans.

In traditional benefit plans, the amount of money you receive in retirement is “defined,” usually by a formula that involves your age, how many years you work for the company and your salary in your highest earning years. In retirement savings plans like 401(k)s, the amount you’re allowed to contribute tax-free is defined by law and by your employer, but nothing guarantees how much—if any—money you’ll have in retirement.

Unfortunately, traditional pension plans have become increasingly rare. Between 1993 and 2007, in fact, the percentage of workers covered by traditional plans dropped from 32 to 20 percent, as 401(k)s and similar savings plans became popular among employers. “For more and more workers, this means that risk—in terms of steady retirement income—has been transferred from the employer to the eventual retiree,” noted the Bureau of Labor Statistics in reporting the numbers.

I think it’s fair to say that now we realize what a risk that is. It’s even become part of our popular culture: One recent installment of Blondie, a comic strip started during the Great Depression, featured Dagwood, surrounded by neighbors, everyone’s hair standing on end as they opened their 401(k) statements.

Originally, retirement savings plans were meant to complement traditional pensions and Social Security. But they started to supplant traditional pensions once employers recognized their benefits. And the benefits—to employers—were substantial. A U.S. Labor Department study in 2000 found that in 1974, companies were paying 89 percent of the costs of worker retirement. Twenty-five years later, with the growth in savings plans, employers’ costs for retirement had dropped to 49 percent.

If you are one of the lucky ones still covered by a traditional pension plan, you can breathe easy, even in a lousy economy: If your employer goes broke and files to reorganize or to liquidate in bankruptcy, your pension is protected. It is insured by the Pension Benefit Guaranty Corp. (PBGC), backed by premiums collected from companies that have such pensions.