Friday, July 19, 2013

Things I Don't Understand: Pensions

Don't get me wrong; I understand the concept of pensions: work for a company for X amount of years, retire, and they'll disperse a check to you every month for the rest of your life (your spouse's life, etc). I get that people choose to work for the government or enormous Fortune 500 companies for perks like pensions. But I don't believe in them. Frankly, I think they're anti-American. (Don't get me started on Social Security.)

That doesn't mean I think people who receive pensions are bad--if you're offered a perk, take it, I say. But pensions are a disservice both to the entities that offer them and the retirees who receive them. 

I can't cite reports, but I do know that people are living a lot longer now than they were when pensions and retirement ages were originally established. Seventy years ago, when a person retired at, say, 65, their former employer would pay a pension to ease their final years generally until the person died. Which, on average, was probably around five years. But people are living much, much longer now, and the retirement age hasn't gone up by much. So these companies are on the hook for years and millions or even billions of dollars, and the funds they're paying out don't actually do anything to boost their company's revenues or productivity: the pension fund is a black hole. 

My feelings are likely strongly influenced by the fact that my parents and both sets of grandparents were/are self-employed. Pensions don't exist in the vast majority of small businesses because they can't afford them and because they don't make sense. 

Let's take a look at Detroit. The city just declared bankruptcy, and while it hasn't been specified which debts, exactly, are going to be erased, their self-proclaimed two largest financial burdens are pensions and healthcare expenses for retirees. This means it's highly likely that a large number of Detroit's retired population will lose or suffer massive cuts in their pensions and/or healthcare. 

So now I circle back around to why pensions are a disservice to those who provide them: there is no crystal ball for economics. It is impossible to accurately forecast a company's profitability in five, ten, twenty years. A company (or city or state, like Detroit and California or, heck, the whole USofA) may be doing great in 2003. They may have cash excesses that make pension funds seem negligible. But what about in 2013, when they're still slogging through the aftermath of economic disaster? What happens when they have to lay off scores of people just to keep paying pensions to retirees who no longer contribute anything to the company's bottom line? Of course it's not a popular decision to cut pensions, especially when the government or unions are involved (again, don't get me started), but it's the decision that makes the most business sense. To keep a drowning company afloat, all excess spending has to be curtailed, regardless of sentiment or loyalties. 

Which brings me to why pensions are a disservice to those who receive them: companies lead their employees to believe that they'll receive their pension/healthcare perks/whatever for the rest of their lives and be well-taken care of in their old age, which is great. But the fact is, especially these days, there is no guarantee that when these employees retire, there will be any money left for pensions. Or maybe the pension checks will come for five years before they're cut. Living on a pension might become terrifying because it could be cut at any time. Also, pensions overall contribute to an entitlement mentality that can be devastating: consider how judgmental we as a country were when Greece was attempting to implement austerity measures because their country was bankrupt, and their people were rioting in the streets because they didn't want to lose their cushy pensions (or was I the only one who was super judgy about Greece?). While I can understand people being justifiably upset because their promised income for loyalty and hard work to a company (or government) is suddenly cut off, does it honestly make sense to receive money for years for work you aren't actually doing anymore?

I had a coworker whose husband was a pilot for a major airline. After 9/11, he, along with many other seasoned pilots, was offered an early retirement package to help the floundering airline save money. He could choose a lump sum payment or a monthly disbursement, and he chose the lump sum. His friends criticized his decision, saying they wanted to benefit from the interest and they couldn't trust themselves not to spend such a large chunk of cash. Sadly, the airline declared bankruptcy a couple years later and completely cut their pension fund. This man's friends were in a world of hurt; they believed that they would be taken care of, and they suddenly had to make some very difficult decisions about how to survive without that expected income. 

I do think companies should offer benefits to their employees as they are able. But committing to an unknown future debt load for an undetermined length of time when the company is in impossible to predict financial profitability doesn't make any sense from a business standpoint. To offset discontinuing pensions, companies could shift toward helping people take control of their own retirement by beefing up their 401k plans, among other things. Companies could double or triple their maximum match to retirement accounts or offer profit sharing directly into retirement accounts. They could offer greater incentives to encourage employees to save for their own retirement. They could deposit money into a "pension" account for each employee that would be turned over to them once they retire, making it so the company wouldn't have continuing expenses for former employees. 

I'm sure there are a slew of other ideas out there. I'm not an expert on any of this and I'm not criticizing people who receive (or expect to receive) pensions. I just strongly feel that pensions are outdated and irrational from a business, economic, and personal standpoint.

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