The bottom line on pensions
'PENSION fund" isn't usually a term that invokes panic, but the current economic crisis has made the mundane terrifying. Investment portfolios designed to provide retirement security for workers are causing headaches for cities, major corporations - even President-elect Obama.
'P
ENSION fund
" isn't usually a term that invokes panic, but the current economic crisis has made the mundane terrifying. Investment portfolios designed to provide retirement security for workers are causing headaches for cities, major corporations - even President-elect Obama.
Every citizen has a stake in understanding these issues and how they affect our lives. "It's Our Money," a joint project of the Daily News and WHYY, talked to pension experts like David Madland at the Center for American Progress and Professor Olivia Mitchell at the Pension Research Council at the Wharton School to make sense of this for us mere mortals.
(For more information, visit ourmoneyphilly.com.)
What is a pension?
Remember that Johnny Cash song where an autoworker steals a car one piece at a time over his career? Saving a small amount regularly throughout a long employment is the pension idea in a nutshell.
Typically, a worker sets aside a portion of his paycheck each week. That amount is matched by the employer and put into a fund that is invested, usually in the stock market.
Once an employee has reached a certain length of service and usually a minimum age (for the city of Philadelphia, the service is 10 years, the age depends on the union), he's eligible to collect that money on retirement.
Who invented pensions?
According to Wikipedia, the idea dates to Charles II, King of England from 1630 to 1685. He awarded pensions to loyal subjects and used them to buy support from nobles. Pensions are now offered by large companies and institutions to attract talented employees.
Who gets them?
About 50 percent of U.S. workers have pensions. They skew wealthy, white and male.
Pensions are usually awarded by companies with 1,000-plus employees.
Small companies, like family businesses or independent contractors usually don't offer pension plans. Unionized firms are more likely to have pension plans, and some pension funds are run by union locals.
Are there different types?
Yes. Defined-benefit plans provide a specified amount of income no matter the performance of the pension fund.
Defined-contribution plans take a specific amount of money, and the payout depends on the fund's performance.
How are pensions linked
to the current crisis?
The dramatic decline in the stock market has hammered the earnings of pension funds.
Most state and local governments have defined-benefit plans. This means losses incurred by the fund must be made up by the government so retirees get the promised amount.
With the staggering losses in the stock market of late, you can see how big a crisis this is. And pensions get even more precarious when you factor in their lax regulation.
Is it like this everywhere?
No. Some countries, notably Canada and Great Britain, have national pension plans administered by the government. The U.S. relies on employers to finance, invest and administer them.
Is ours better or worse?
First, we have thousands of different pension funds, which is incredibly inefficient.
And while rules covering private and government pensions may vary, one - the one requiring fully funded pensions -can prove problematic.
That requires companies to have enough money on hand to fund all current and future pensioners. That's why costs for employee benefits represent a growing challenge for many U.S. companies. Especially when they compete globally. *
Ben Waxman reports for "It's Our Money," a joint project of the Daily News and WHYY funded by the William Penn Foundation. Contact him at