Why Pensions are Disappearing And What You Can Do Instead
Why Pensions Are Disappearing
Pensions are a benefit plan funded by employees and employer contributions. Pensions are managed by the company or an investment firm it selects. Because pension plans were often set up with expectations of lower life expectancies and higher stock market returns, they are often underfunded.
Pensions are disappearing in the private sector, since they leave large businesses with undefined and decades long financial obligations to former employees and their families. Pensions were inflated by union demands to build in minimum annual increases in benefits regardless of the rate of inflation and many people who retired at 50 or 55 before collecting for 30 years.
Most young workers will never receive a pension. Many who have pensions may lose them in the future. For example, companies going through bankruptcy can shed the pension plan as a liability through the bankruptcy proceeding. Pensions that are discarded by a company during bankruptcy are picked up by the Pension Benefit Guaranty Corporation, an arm of the federal government. If the company's pension plan is rescued by the Pension Benefit Guaranty Corporation, it has the right to slash pension benefits in order to keep the plan solvent with the assets it currently contains.
Increasing numbers of companies are offering cash "buy-outs" to those who had pensions to get out from under the financial burden of pensions. Fortunately, there are many options for you to save for your own retirement, whether you are not eligible for a pension or if a pension is no longer available to you.
What Can I Do to Save for Retirement Instead?
Whether you need to save for your own retirement because you do not have access to a pension or received a lump sum payment in lieu of a pension, you have options to save for your own retirement.
Your retirement saving options can be divided into two categories: tax advantaged plans and personal savings. Tax advantaged plans are further broken down into Individual Retirements Accounts and 401Ks. You cannot expect to rely on Social Security Disability or Social Security Income for your retirement, for reasons elaborated near the end of this article.
Individual Retirement Accounts
Individual Retirement Accounts or IRAs are tax advantaged retirement funds. In the case of the Roth IRA, you contribute up to $5,000 post-tax but do not pay income taxes on the distributions upon retirement.
For traditional IRAs, your taxable income is reduced when you contribute to the IRA but you will pay income taxes on the withdrawals when you retire. Both types of IRAs have catch up provisions, allowing those over age 50 to contribute an extra $1,000 per year.
Both types of IRAs are thus tax advantaged, avoiding the double taxation of investing after-tax money and then paying taxes on the proceeds.
What is a 401K? 401K is a section of the United States tax code.
A 401K plan is a form of employer sponsored retirement plan. Money goes into the 401K retirement savings plan pre-tax, reducing your taxable income. The employer generally matches the first few percent of the employees' contributions. You can put in up to 20% of your income into the 401K up to a maximum around $17,000, though this amount is $5,500 higher if you are over age 50. The money grows tax free, but it is subject to income taxes when you pull it out at retirement age, considered 59 1/2 by the government. If you pull money out of your 401K before age 59 1/2, you will owe both income taxes and an additional 10% penalty.
Personal savings are the traditional form of retirement savings. You put a little money back each month to live upon when you could no longer work. You can still contribute to personal savings accounts in addition to IRAs, 401Ks and pension plans. Unlike 401Ks and IRAs, you can put as much money as you want into a personal savings account.
Money in a personal savings account can also be used at any time for any purpose, whether it is a trip to Europe, unexpected medical bills or living expenses when retiring before Social Security kicks in. Pulling money out of a personal savings account during retirement does not affect your Social Security benefits or increase your tax bracket.
What About Social Security As a Fallback for Pensions?
Social Security is a tax that is supposed to go into a trust fund. Social Security funds were intended to provide a minimum payout to those who were elderly, eliminating the extreme poverty that used to be associated with old age. Social Security was expanded to include the disabled who could not work.
The growing demands upon Social Security and funding shortfalls are why it is in danger of falling short like pensions. If this happens, Social Security benefits will be cut for everyone currently collecting; and the legally mandated cuts for Social Security are 25% when money does fall short.
An Overview of Social Security Retirement Benefits
To qualify for Social Security retirement benefits, you must be at least 62 years of age. Full benefits start between ages 65 and 67, depending on the year you were born. You go to the Social Security office and apply for the program. If you are claiming benefits on a current, deceased or divorced spouse’s benefits, you may be required to provide proof of the marriage. The checks start soon after.
Why Is Social Security In Danger?
Social Security, when it was first set up, had a retirement age several years higher than the general life expectancy. In short, more than half of the population died before they were eligible for collect anything from Social Security. While life expectancy rose throughout the 20th century, work force participation increased, so more money was collected in Social Security taxes than was paid out.
Unfortunately, politicians primarily used Social Security money as part of the general budget through the 1960s and 1970s. There is no "lock box" or special Social Security savings account at the treasury. The money millions of workers paid in has already been spent; Social Security is essentially breakeven today with money coming in from Social Security taxes going out to beneficiaries.
Another problem with Social Security has been the broadening of the term "disabled". It used to be necessary to prove that someone was incapable of working, had no relatives to rely upon and was generally too old to retrain for another position. One had to be severely disabled, such as blind, paralyzed or suffering from dementia to receive Social Security disability. It was almost impossible to qualify for before the age of 50. In the name of compassion, Social Security disability was expanded.
Those who had back injuries could claim disability and live off the benefits, instead of training for clerical work after being injured at the construction site. This resulted in many who could work with treatment or therapy joining the ranks of the disabled instead, further draining a system burdened by the graying of the population, the Gray Tsunami of the Baby Boomer generation retiring.
- Social Security's Finances Keep Getting Worse | myHeritage
Heritage Foundation scholar David John summarizes a new report from the trustees of the Social Security program; April 23, 2012 report summary by the Heritage Foundation
- Americans need to rethink disability policy - Charles Lane
Social Security Disability insurance threatens to"erode productivity, swallow up scarce tax dollars, and make it that much harder to afford a sufficient safety net for everyone who needs it.
Pensions are disappearing because the promised amounts were inflated at unsustainable rates to meet the demands of unions and promises of politicians. Social Security was underfunded to meet inflated spending of prior administrations and an inability to properly plan for a rising average life expectancy. The best options available are saving money for retirement are in tax advantaged savings plans like 401Ks and IRAs. Expecting others to provide for your retirement, either in company provided retirement plans like pensions or government provided plans like Social Security have proven a bust on all counts.
Save for your own retirement, because others giving that responsibility are unable to keep their hands out of the cookie jar.