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|Subject: Traditional pension rant (long)||Date: 11/12/2003 6:24 PM|
|Author: Watty56||Number: 37787 of 75782|
Recently there have been a number of articles and postings that tend to portray the traditional pension plan as something completely wonderful that had few downsides compared to 401K's and IRAs. Here are some of the problems that I see with the traditional pensions.
1) Inflation drastically reduces the values of any traditional pension. A few years of double-digit inflation cut the value of many retirees' pensions in half in the 1980's. Even at four percent inflation, a retiree who lives 20 years will see their pension greatly reduced
2) To have the pension continue for the spouse after the retiree died you had to take a significant reduction in benefits. If you guessed wrong about which spouse would die first then you lost a lot of the benefits that you could have had. (There were some limited situations where a death soon after the decision was made would cause an adjustment to be made.) Lump sum distributions were also a gamble.
3) The way the traditional pension worked caused most of the pension costs to accrue in the final years of an employee's career. This means that it was difficult for an older employee to get a job and gave companies a large incentive to get rid of their older employees.
4) It locked older employees into a company and gave them very little negotiating power if they didn't like their situation because the company knew it would be difficult for them to leave. As a person neared retirement raises (even for inflation) tended to be meager because the company knew that any raise would have a large affect on the pension liability.
5) Anyone who changed jobs lost lots of the pension money they could have had because of they way it was calculated. A person who worked 40 years at one company would have a much larger pension than a person who worked at two companies for 20 years each. Part of the reason for this was that the first jobs pension was based on the salary they had 20 years before retirement. (Inflation strikes again!)
6) Vesting periods tended to be long so that if you left a job after less than five to seven years you might not get much of any pension credit for those years.
7) Traditional pensions are sometimes under funded or subject to changes when companies merged or went bankrupt. There is a pension guarantee fund but it does not always pay the entire promised amount.
The biggest upside to traditional plans that I see was that people were forced to participate.
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