The Death of the Pension

The United States pension is said to date as far back as the revolutionary war. If soldiers survived the war they were rewarded by the government with an income for life. The first corporate pension was established in 1875 by American Express.

Recipients must have been at the company for 20 years and were faced with board approval. However, if they passed they would receive half their annual salary for life.  More and more major companies began to offer retirement pensions as employment incentives. In 1921 the Internal Revenue act provided exemptions for contributions into employee retirement plans and was a major catalyst to the general adoption of pension plans. A pension is a defined benefit plan because employees are told what they will get in retirement, and it is typically a percentage of their annual salary. Since 1980, the percentage of the workforce covered by a pension plan has shrunk from 38% to 13%. This is largely due to the cost of pension plans as well as the emergence of the 401lk and mutual funds. Today a large part of the workforce is in a defined contribution plan, where your contribution to retirement is a percentage of your salary. Often the contribution is invested into various mutual funds or company stock selected by the employee. Sometimes when large companies are restructuring they will freeze pension contributions. For example, GE recently announced they will free pension contributions until the have cut down on their debt. On the balance sheet future pensions count as accounts payable. They are a form of debt. As companies continue to move away from pensions, the popularity of annuities will continue to grow. The biggest concern of retirees in the United States is running out of money. Pensions helped alleviate that concern because there was a guaranteed stream of income. With an income-based annuity a lump sum payment can also get you a guaranteed lifetime stream of income. This could help plug the gap between your expenses and income and in turn help you avoid running out of retirement funds. There are different kinds of annuities for different situations so it is always important to check with an advisor that specializes in annuities to make sure you are on the right track.

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