Pensions are a little rare today, so rare most people don’t really know how they work. Pensions also known as Defined Benefit retirement plans, pay someone a percentage of their income when they retire, based upon age, years of service, wage history and the design of the plan. Millions of people still have them, typical if you work for a large company like IBM, or are a public employee of the federal, state or local government. Social Security Retirement Income also kind of works the same way.
The nice thing is that the employee/participant doesn’t have to worry about the plan’s investments like they would with a 401k, just your long-term employment which is necessary to get much from them. Long-term employment is rarer these days too. These plans are costly to administer and fund, therefore many employers have done away with them, or switched to a less costly and risky plan (for the employer), called Cash Balance plans.
Pensions, or defined benefit plans sound safer, but are they? If you work for a private employer, they might not be, consider this recent article: Corporate Pensions Are in Trouble Too – Total Return – WSJ. If you work in the public sector, since they are funded sometimes to a great extent by taxes and not employee contribution, it depends upon their ability to tax and invest the proceeds, and health insurance costs for retirees. In these difficult financial times, this is all the more challenging. Private plans have some insurance provided by the Pension Benefit Guarantee Corporation, and this has helped some plans that have gone under, but it would have difficulty bailing out a rash of plan failures.
Is this cause for panic? No, but it helps make the case for individuals to save for the future, even though they may have these types of plan.