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Want security? Forget pensions

By Barbara Whelehan ·
Friday, May 28, 2010
Posted: 12 pm ET

Back in 1973, I took a year off after graduating from high school to work in downtown Chicago. The human resources person reeled off the benefits at the title insurance company where I was hired as a clerk typist. "And we have a pension plan," she said. My eyes glazed over and I remember thinking, "Oh sure, I'm concerned about getting a pension right now."

It would be the only time I received such an offer.

Today, you'd be lucky to find a pension plan in the private sector, even if you apply at a huge multinational firm. New hires are more often getting shunted to an account-based plan such as a 401(k) these days, even if a pension plan is already in place at their new company. According to a new study released by employee-benefits consulting firm Towers Watson, among Fortune 100 companies, only 17 offer new employees a traditional pension plan -- one with payouts based on a formula that takes into consideration salary and tenure.

A quarter of the firms offer a "hybrid" plan such as a cash-balance plan, which is generally funded exclusively by the company. The advantage to workers: You're not trapped into working at the firm for decades to reap the benefits. When you escape, you can take the funds with you if you're vested.

The majority of Fortune 100 firms -- 58 of them -- offer defined contribution plans like 401(k)s as the only option to new hires. In 1985, 90 of the Fortune 100 offered defined benefit pension plans while 10 had account-based plans. Times have changed.

Work for the government?

I've always joked that I'd like to find a government job so I can get a pension. But many government plans, including Social Security, face funding problems. New Jersey recently curtailed some benefits in its public pension plan to address its $46 billion shortfall. Part-time workers are no longer eligible for benefits, and a 9 percent pension benefit increase granted in 2001 has been rolled back.

Funding shortfalls in Maryland's public plans prompted talk in recent months of shifting the liabilities of teacher pension payments to local governments, though that plan was tabled. Instead, the state is setting up an independent commission to study the state's public pension liabilities.

And future teachers and government workers in Illinois will have to wait until age 67 to retire with full benefits. The formula for figuring out payments will be based on an eight-year salary average rather than four years.

California's pension problems are probably the worst in the country, with an estimated shortfall of $536 billion, according to one study. That's partly because the three big public funds were overexposed to risky assets, an investment stance common among public plans.

Compared to public pension plans, private plans are doing well because they're subject to higher funding standards (although don't get me wrong -- some of those are in trouble, too). But as you can see, private plans are quickly receding from the landscape.

So what's the takeaway? If you want retirement security, you have to create it for yourself. Heck, you can buy a goat farm if that's what it takes.

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May 31, 2010 at 12:42 pm

Actually, I don't believe that's true in Ohio. Ohio's STRS is considering changes that will also reduce benefits for employees and vested former employees who are not yet eligible for retirement. For example, they are discussing averaging the top 5 years rather than the top 3, and cutting back cost-of-living adjustments. So if you worked there for 20 years, then left to follow a spouse, for example, and are now 55 and can't qualify to retire for 5 more years (at a reduced rate), after the proposed changes kick in, you would get less under the new changes than what was promised to you at the time you left and which you were counting on when you made the decisions to join and to leave. You may have accepted lower pay rates or other benefits in order to get those benefits under those terms. You should have been legally vested in those amounts.

ERISA treats public pensions differently from private pensions - I don't believe this would be legal for private plans.

Barbara Whelehan
May 30, 2010 at 9:56 am

Hi Art -- You're right: Pension promises for current employees and retirees are sacrosanct. The changes I wrote about will affect future employees, not current ones. For example, the rollback in the New Jersey plan of the 9 percent increase granted in 2001 "makes pensions for future hires less generous," according to an article in Thanks for your comment.

May 28, 2010 at 2:53 pm

I hope you are right but my reading of the law is that the govt can double the tax on your house or double the income tax before they can renege on a penny on a govt or education pension. For some reason the law favors pensions over social security according to a lawyer I know that works in labor law