July 9, 2013

6 Common Myths About Pensions

Once in a while you'll see people perpetuating myths about pensions.    I don't' know where some of this stuff comes from but I see some of the same myths over and over.   


Myth #1 : Nobody has a pension any more.
Fact : About 20% of the working population is covered by a defined benefit pension.
Its true that pensions are not as common now as they were in previous decades.   However they aren't extinct.   There are still many government and union workers who have pension plans.

Myth #2 :  If a company goes bankrupt then you'll lose your pension.
Fact : Bankruptcy does not wipe out pension obligations and pensions are guaranteed by the PBGC.
I write about this one in What Happens to Your Pension if Your Employer Goes Bankrupt?
The PBGC is an independent agency of the federal government.   It guarantees pensions in the case when companies go bankrupt.   The system works pretty much like how FDIC covers bank accounts.  There is a limit to PBGC coverage and high value pensions may be cut under PBGC coverage.  However the limit is $57,000 at age 67 so few people would be hit but the cut off.

Myth #3 : Companies can raid your pension and cut your benefits.
Fact : Companies are not fee to 'take' pension funds out of a pension system and are not legally allowed to reduce already earned and vested benefits.
Private pensions are heavily regulated by the federal government.   The ERISA law regulates pensions and defines vesting periods.   Once you are vested in a pension you've earned the benefits.  Under the federal law the employers have fiduciary requirements to employees for their pension funds.

Myth #4:  You're better off with a 401k.
Fact :   Usually not. -- But it depends.
Without knowing the details of the 401k or the pension or a persons circumstances this is not something people can say with certainty.   Comparing a 401k and a pension is kind of an apples to oranges comparison.   Pensions are low risk and guarantee a lifelong benefit but you retain no assets, 401ks have a lot more flexibility with assets directly handled by the retiree but no guarantees.  Yet in my opinion at least I would say that usually pensions are better.   Generally speaking most pensions offer higher dollar value benefits to retirees than most 401ks.   Thats a major reason why pensions were replaced by 401ks and pensions mostly phased out -- to save companies money.   Many people prefer to manage their retirement funds themselves, but the majority of people do not do a better job investing their funds than the market average or professional money managers.  In fact most individual 401k owners do a pretty poor job.

Myth #5 : Pensions are all underfunded and they are going to run out of money.
Fact :  Most pensions are under funded but that doesn't mean they'll run out of money.
As of 2010, about 80% of pensions covered by the PBGC were underfunded by about 20%.   That seems bad.  However we should keep in mind that the funding of a pension looks at all the future liabilities and assets for all retirees projected into the future.  If a pension is 80% funded that doesn't mean they're short 20% today, it means that the actuaries calculate that the assets held today are only sufficient to pay 80% of all the liabilities.  Its just a snapshot in time.   The calculations are based on interest rates and market conditions.   Back in 2007 the average funding rate for private pensions was 111% but just two years later in 2009 it had dropped to 80%.   Thats mainly due to market conditions. And as of 2012 a recent law may have drastically changed the funding outlook for many pensions by allowing them to use higher historical interest rate averages.

Myth #6 :   Everyone used to have a pension.
Fact :  Most private sector employees were never covered by pensions.
According to the ERBI the peak of private workers covered by pensions was 46% which we hit in 1980.  After that it declined.    While pensions were a lot more common in the past than today, most people didn't have pensions in their jobs.

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