Thursday, December 18, 2014

Pensions: A quick guide to the issue behind the strike

If you've been following the SEPTA strike, you've probably heard that pensions are the key issue. According to union president Willie Brown, workers will stay on the picket line until management agrees to fully fund their pension plan. SEPTA says it simply can't afford to spend the money.

Pensions: A quick guide to the issue behind the strike

If you've been following the SEPTA strike, you've probably heard that pensions are the key issue. According to union president Willie Brown, workers will stay on the picket line until management agrees to fully fund their pension plan. SEPTA says it simply can't afford to spend the money.

Is this realistic? Is it reasonable? Unfortunately, in addition to being controversial, pensions are incredibly complicated. Below is a basic guide to pensions and why the TWU pension is causing so much trouble for unions, management, and taxpayers.

What is a pension?

Remember that Johnny Cash song where an autoworker steals one piece of a car at a time over the course of a career? That basic idea -- setting aside a small amount of money regularly throughout a long employment -- is pensions in a nutshell (minus the stealing!). Typically, a worker sets aside a portion of her paycheck each week. That amount is matched by her employer and put into a separate fund. That money is invested, usually in the stock market.

Once an employee has reached a certain length of service she is eligible to collect her pension. The money is paid out over a period of time based on the contract between the worker and the company.

Are there different types of pensions?

Yes. Defined benefit plans always provide a certain amount of income no matter the performance of the pension fund. Defined contribution plans only guarantee the same financial contribution from an employer over the course of a pension.

I want a pension. Who gets these things?

Only about 50% of American workers have pensions. Demographically, they skew wealthy, white and male. Pensions are usually awarded by companies with 1,000+ employees. Small companies, like family businesses or independent contractors, typically do not offer pension plans. Unionized companies are also more likely to have pension plans. Some pension funds are run by union locals.

Oh. That's a bummer. Is it like this everywhere?

No. Other countries, most notably Canada and Great Britain, have national pension programs administered by the government. The US relies on the employer to finance, invest, and administer the pension.

How are pensions connected to the current economic crisis?

At a basic level, the dramatic decline in the stock market has hammered the earnings of pension funds. If you are invested in the stock market for retirement, it's best to not look at your account for a few months. State and local governments have to, though, and are required to make up the difference for their retirees. So pensions have become a financial problem for many municipalities.

Also on IOM today: Nutter gets out ahead next year's pension crisis; Council asks for a do-over.

About this blog
Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.

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