For decades, the "traditional" defined benefit pension—paid for by employers—was the retirement foundation for millions of workers. It still is for some 90% of public-sector employees and close to 20% of those in the private sector, many of them union members.
But "change is a law of life," as John F. Kennedy told us. Nowhere has that been truer than in the long struggle by unions to make sure that working men and women can go into retirement with decent pensions.
UNION WORKERS ARE MORE LIKELY TO HAVE
HEALTH AND PENSION BENEFITS, 2007
Note: Defined-benefit pensions are a subset of all pensions. Disability refers to short-term disability benefits.
Source: U.S. Bureau of Labor Statistics, Employee Benefits in Private Industry, March 2007. August 2007.
Prepared by the AFL-CIO.
The bad news about pension plans
The number of companies willing to sponsor traditional pension plans is steadily shrinking. Employers continue to freeze or terminate their defined-benefit pension plans as they look for less expensive options.
In recent years, massive bankruptcies in the aviation, steel and other industries dumped billions of dollars in pension obligations on the Pension Benefit Guaranty Corporation, raising fears that a taxpayer bailout might be required. So far, the PBGC has held steady. In fiscal 2007, the agency paid $4.3 billion in benefits to workers and retirees.
The corporate search for less costly retirement benefits has led some employers to swap their defined benefit pension plans for retirement savings plans that are funded mainly by employees.
Other employers have moved to hybrid cash balance-style pension plans, which are also less expensive. But because cash balance plans reduce future benefits for older workers, they are a subject of continuing controversy.
What flavor is your pension?
Defined Benefit Pension Plan:
This pension, paid by your employer, promises you a specific monthly payment when you retire. The benefit is usually based on a combination of your salary and number of years of service. If you're married when you retire, you'll be asked to choose whether to take a full monthly payment for your lifetime, or to take a smaller payment now and leave a monthly benefit for your surviving spouse.
Hybrid (Cash Balance) Pension Plan: In this kind of plan, your employer credits you with a percentage of your pay each year plus interest at a rate determined by the company. The employer controls the plan's funds and investment choices. Your "account" is merely a calculation of your accrued balance. When you retire, you generally have the option to take your balance as a lump sum or convert it to an annuity for life. (If you are married, you can't opt for the lump sum without your spouse's consent.) For more information on cash balance plans, see Frequently Asked Questions about Cash Balance Pension Plans.
More about benefits for your spouse
One of the most important decisions you will make when you retire is how to take your pension. Before you decide, draw up two retirement budgets. In the first, estimate how much income you and your spouse will need while you are both living. In the second, determine how much income the survivor will need to live on his or her own. These estimates will help you make your choice.
If you are willing to receive less money each month, you will be able to leave a portion of your monthly payment to your spouse after you die. The most common spousal benefit is 50% of your payment, but some plans offer 75% and 100% benefits. Generally speaking, the less money you take each month, the higher the payment you can leave for your spouse. It's very important to fully understand all the choices that you have.
Example: Your maximum pension payment is $2,500 a month. You decide to take a 50% spousal benefit, which reduces your payment to $2,200 a month. However, when you die, your spouse will receive payments equal to 50% of yours: $1,100 a month.
Caution: If you opt one of the lump-sum pension plans, tell your benefits person that you want to do a direct transfer of your money to an IRA, which allows you to invest the money for future growth while avoiding a big tax bite. Mutual funds, banks and other investment companies will be happy to help you open a new IRA.
How is your pension affected if you leave your job?
If you are vested in your employer's pension plan and you leave your job before you reach the company's official retirement age, the answer will depend on these factors: your age, years of employment, your accrued pension benefits and the rules of your pension plan. Ask your employer's benefits person or union representative to explain your options for retaining some of your pension plan benefits for your retirement.
If you changed jobs after becoming vested in a previous employer's pension plan, you may be entitled to pension benefits from that job—even if the company went out of business. Search at the PBGC site or download this booklet on finding a pension plan (requires Adobe Acrobat).
Keep an eye on your plan
When you join a pension plan, you will receive a Summary Plan Description (SPD) that tells you how the plan works. If the SPD isn't easy to understand, ask your company benefits person or your union representative for an explanation. Keep a file that includes your SPD and any plan statements or reports you receive. You should also make it your business to find out:
- What type of plan you have. Is it a traditional defined benefit pension, a cash balance plan,
or a retirement savings plan?
- How plan benefits are calculated.
- When and in what form benefits are paid. What types of options are available?
- The financial consequences of retiring early.
- When you can start participating in the plan.
- When your pension benefits become vested. The "vesting period" is a certain number of years
you must work before you are eligible to receive benefits (usually 1- 5 years).
- How to file for pension benefits.
- Whether your plan is underfunded or overfunded.
The funding level of a defined benefit pension plan is one measure of its ability to pay the promised benefits. Another is the stability of the employer(s) and their ability to make ongoing contributions to the plan. The Pension Protection Act of 2006 (PPA) provided a new framework for funding defined benefit pension plans and required employers to communicate this information to the participants.
Traditional pension plans are heavily regulated, which adds to their overall security. Rules for the design, funding and administration of non-governmental defined-benefit pension plans are provided by the Employee Retirement Income Security Act (ERISA). In addition, pension plan benefits are guaranteed to certain levels by the Pension Benefit Guaranty Corp. (PBGC). This federal insurance agency pays workers' benefits if their employers get into financial trouble and terminate their pension plans. Check out the PBGC and what they guarantee here.
Learn more about safeguarding your pension from these Department of Labor documents:
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