The Decline of Pensions

For decades corporate pension plans were commonplace, even expected as a benefit of working for most large companies in the US. The trend has long since reversed since companies have had a harder time reaching the projected funding requirements for retirees. The first bank I worked for offered a pension and a 401(k) plan when I started. The 401(k) plan options expanded while the pension plan, in turn, was dissolved. Recent college graduates would never know the reassurance of having their employer fund their retirement without a personal contribution, a reward for loyalty and tenure.

Later, I went on to work for another Fortune 500 employer who gave all their employees a yearly pension contribution, but a corporate policy change in 2016 ended that. We received notice the company would no longer be making contributions and the program would be winding down. They would continue to offer a matching 401(k) contribution which was a perk we could still get reasonably excited about. Companies match anywhere from 2.5% to 6%.

A survey taken last year showed the S&P 500’s biggest pension plans faced a combined funding shortfall of $382 billion. Bloomberg You have probably heard about companies offering lump sum payments for their tenured employees to retire early. Others are “forced” into early retirement. These early departures enable executives to offload a pension liability each time a long-term employee separates from the firm. However, underfunded pension plans are not unique to corporate America.

States are also dealing with fiduciary weakness as retirement funding projections implicate a system which is not working as it was designed to, including Oregon where I live. The Public Employee Retirement System (PERS) was underfunded by $22 billion in 2017. Historically, once news is released of state retirement plan under funding, it can have a “wave effect” as more employees begin to investigate their options for retiring sooner rather than later. Officials did not want this as it would exacerbate the capacity for the system to fund near-term obligations. Statesman Journal

Oregon is not alone. States countrywide are experiencing similar conditions due to lower investment returns.  The government-implemented economic stimulus and recovery policies that followed the stock market crash of 2008 pretty much busted retirement income models for states all over. Pension funding gaps rose to a combined total of $1.4 trillion nationwide. Yahoo! Finance

There is a silver lining, however. Investment returns were much higher last year and will help close the funding gap. States officials are also investing more heavily in equities, leveraged funds, and other non-traditional products which also add more risk to their portfolios. The instability of the current Administration has introduced a new variable which has many worried now. Stocks have taken several tumbles already this year, and it isn’t possible to know if there is any actionable economic policy being articulated with each startling tweet.

One thought on “The Decline of Pensions

  1. I’ve been thinking a lot about this in terms of GE… specifically, what increases in interest rates, even small ones, will do to the liability estimate.


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