Defined Benefit Pension Plans and Retirement

In days past, if you were fortunate, your full time job included what is known as a defined benefit pension plan. Your ‘benefit’ was determined, or defined, by how long you worked for that employer, your age when you retired, and how much you were making when you retired.

That last element might have been a formula, or average, based on your last few years of income from that same employer. Perhaps there were additional options if you had a spouse.

Your employer might have been a private employer, such as the one who employed my father for many years, Caterpillar Tractor Company. Or it might have been a public employer like mine which was the State of Florida. In either case, whether private or public, it was always assumed there was a reserve established by the powers that be to ensure retired employees would receive a monthly stipend as determined by the rules in place prior to retirement.

That monthly stipend, coupled with benefits from the Social Security System, would provide an income for those no longer working. In other words, a more or less guaranteed stream of monthly income with which to pay for shelter, food, health care, etc. The necessities of life would be paid for, even if the days became dark, and the cost of living slowly increased.

During the last half of the 20th century, with life expectancy growing rapidly, it became apparent that the aforementioned reserves would not be enough. An effort was made to shift the burden of commitment from the employer to the employee. Defined contribution plans surged to the fore, meaning if you as an employee chose not to contribute to the so called ‘retirement plan’, you’d be out of luck if the bucket ran dry before you died.

Today, there are still some 25 million Americans who participate, either as still working employees, or as former employees, in defined benefit pension plans. There is a looming crisis in that most defined benefit pension plans are grossly underfunded to the tune of an estimated $1.4 trillion.

And that’s after a decade of strong investment returns. When the next crash happens, all bets will be off.

Couple this with Congressional intransigence about finding a fix for the Social Security System, and you and I, along with our children and grandchildren, are facing a crisis of epic proportions.

My inspiration for this blog post can be found here:

Tony Kendzior \ June 13, 2019