On this episode of Tape Talk we examine the state of pensions in today’s world. Are they the solid and secure retirement tool they’re made out to be or are they slowly going the way of the 8-track?
A Brief History of Pensions
When it comes to financial history, pensions are fairly young. The private pension system in the US began in 1875 when American Express was the first company to develop a pension for its retirees, 60 years before social security began. Far from a posh retirement, the original pension paid, at most, half of an employee’s ending salary. Further, Employees weren’t eligible for the pension until age 60 right about the life expectancy at the time.
How A Pension Works
Most of us are quite familiar with how a company retirement account such as a 401k works, but the discussion gets a bit fuzzy when the topic of pensions come up. While a typical 401k works more like an account, a pension operates more like a contract. In fact, they’re much more similar to an insurance plan than a 401k. With a pension, contributions from employees and employers are collected, payments are made to current retirees, and the remainder is saved and invested for future payments. The system actually works quite well when the program is managed prudently.
How Does A Pension Fail
The major issue affecting pensions today is that the math guiding them is based on a wide variety of assumptions. Add to this the fact that budget-strapped states and municipalities often underfund a pension to balance their operating budget and you have a recipe for failure. This is just part of the reason that the Kentucky Employees Retirement System (KERS) is cited as one of the worst-funded pensions in the country and risking failure. What should you know about the Kentucky Pension system or your own pension?
Why Care? What Should You Do?
While many people don’t directly rely on a public or private pension for their retirement we are all still directly affected by the state of public pensions today. First, pension shortfalls will result in either higher taxes or cuts to other important areas of state and municipal budgets. Second, if pensions decide to cut benefits the quality of employees they’re able to attract and retain may drop this could have a lasting effect on school systems, emergency management, and other critical areas of public service. Finally, while many of us might not have a traditional pension, in many ways our own 401k is our personal pension. The question we all face is whether or not our own personal retirement plan is solvent. When’s the last time you sat down with an advisor to run the numbers and figure out if your retirement plan is a dream or a reality?