ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Retirement

Yes, Pensions are a Dying Breed, and Here is Why

Updated on May 17, 2012

Pensions in the New World Economy

While the facts presented by Slywas007 in the Hub Pensions Are a Dying Breed are pretty accurate, I couldn't disagree more with his opinions and conclusions. The post WWII era allowed for unprecedented growth in our economy because much of the remaining developed world was trying to recover from the devastation of the war. Our manufacturing survived the war unmolested and had cranked up in support of the war effort. As a result, we made the things the world needed. This growth allowed for extremely generous future benefits for employees. Fast forward to a now competitive world and you simply cannot mortgage your future as we did in the past.

To understand why pensions are dying, it is important to understand how they work. As mention in Pensions Are a Dying Breed, pensions are a defined benefit. This means that no matter what happens in the markets, you are guaranteed a specific payment upon retirement. While this sounds great, the guarantee does not come without risk. With a pension, the risks are fully assumed by the company. Again, this sounds great, the company has to pay my way until I die, but the reality is that a well performing company today, may not perform very well into the future (Kodak and Blockbuster come to mind). With a large pension obligation, companies become constrained in their ability to management costs, because the pension liability must be funded. In essence, no matter what happens in the market, the company is on the hook to cover the obligation. As before, this sounds nice, until you recognize that companies who are constrained by large future obligations cannot respond as quickly to competitive pressures. As a result, they often go bankrupt which is an enormous net negative to society. Especially in a marketplace where much of the competition comes from foreign competitors. Just as the United Sates is being consumed by the liabilities of Social Security and Medicare, so too are companies that offer lifetime pensions. The math is essentially the same, except that companies cannot borrow or print money to cover the liability and they certainly can’t raise taxes (prices) as the government can.

Slywas007 makes the assertion that companies are mainly getting rid of pension due to executive or corporate greed, which is also a falsehood, built around populist rhetoric. While I know very well, just how corrosive executive greed can be having watched it first hand, this is not a case of executives going after the little guy to make a buck. The reality is that companies often contribute ore when they move to a 401(k) plan in a given year. However, it is a one-time obligation. If executives were trying to maximize their profits in the short term, it would often be easier to stick with a pension plan as the funding and resulting income statement expense is much more flexible than a straight 401(k) contribution. However, as executive look at the business long term, they often realize the potential impact of the ongoing pension obligation can be devastating in terms of both cash flow and income statement impact. This is indeed one example where decisions are made from the long term and not the next quarter.

In the end, the death of pensions are not the result of conspiratorial efforts by the elites, they are simply a result of the changing face of business. While this may not be a popular sentiment, it is a reality, and to simply wish it away, will not change the facts. Whether we like it or not, we are in a competitive world economy, and until and unless we are willing to recognize and respond to that reality, we will continue to “tilt at windmills”, and blame the boogeyman of the day.


    0 of 8192 characters used
    Post Comment

    • T. R. Brown profile image

      T. R. Brown 5 years ago from Nashville, TN

      Thanks very much Eddie.

    • eddiecarrara profile image

      Eddie Carrara 5 years ago from New Hampshire

      I often thought of pensions as pyramid sachems, the first person in gets payed, and the last person in gets... well, not payed what their promised because the company collapses. I think IRAs and 401ks are the way to go, you become personally responsible for your retirement, and that's OK with me, good hub, voted up and interesting :)