Wednesday, April 11, 2007

Counting on a Pension?

An article in MSN this weekend called "Retirement plans under Siege" discusses how companies are moving away from traditional pension plans. I've discussed this before, but I think it really bears reminding, that people who are financially secure in retirement have a traditional pension. They get a set amount of money every month for the rest of their life.

This amount is determined by years of service and income earned during set period. However companies cannot afford to keep funding such plans and thus are moving towards a cash balance plan.

What's a cash balance plan? It's where the company put ins 10% of your salary since you start working and it earns 6% every year. Then when you leave they give you this amount and say good-bye. This is a great deal for companies because they are able to end their retirement obligation to you the moment you walk out the door.

However this is horrible and bad for the average consumer. Most people do not realize that they are not like their parents/grandparents. They will not have a pension plan to replace 50-7% of their income for the rest of their lives. They will instead need to draw from a cash balance plan/401k/IRA combination. Meaning if you do not save on your own the company will no long bail you out.

Want to guarantee pensions are dying? Look at Enron, or more currently GM, FORD, Chrysler. These huge automakers have large pension liabilities. Because of these obligations they are unable to turn a huge profit on selling cars. Thus American Car companies in Detroit are going bankrupt. The Motor city is dying and fast.

Japanese autocompanies don't have this obligation, and thus their companies look like better investments. For one thing their plants are not in states with strong unions. They are not going to set up pension plans that will destroy their companies. I don't forsee there is a way out for GM, Ford, or Chrysler without cutting future benefits.

I am not personally involved the automakers decisions in Detroit, but at least where I am from in Hawaii, there has been reform of the retirement pensions. It used to be very generous and comprehensive. Now it's much tougher to get a full pension including medical benefits. A person has to work for 25 years for the state instead of 10. They only it get for themselves and not their spouses. They are now obligated to work until 62 instead of 55.

Just this little changes have eased the burden for the state. And yet the state is slowly easing more and more reform, by introducing the 401k for their employees. By making it a longer duration needing to work for one entity without leaving to qualify, etc. So how many young workers will really stay 25-30 years with the state?

Thus companies are the ones changing the landscape of retirement. People will retire on less than 50% of their pre-retirement income. And there are those who say "great, I have no mortgage." But then I remind them what about medical premiums, what about property taxes still escalating, what about replacing a failing car, etc? Just because some bills go way, there will for sure be an increase in others.

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