Friday, August 18, 2006


Pension "Quick Fix"

The President just signed into a law intended to repair the pension system for millions of American workers. The law represents a minimalist approach to the problem. Companies that offer a pension benefit to their employees will be required to fund the program fully within seven years. Companies that have plans that would have to be taken over by a federal agency if the company defaulted would have to pay higher premiums to the agency. (I've forgotten the name of the agency at the moment.) There is no requirement that companies even offer a pension plan to their employees, or that a company that does offer a plan must continue to offer it to new employees. It's a band-aid approach.

Because of global competition, some companies are finding it too expensive to provide full funding for their pension plans, or to keep the plans at all. Some airline companies are shedding their pension plans as part of the process of going through bankruptcy. The plans are taken over by the federal agency I mentioned in the previous paragraph (whose name I still can't recall).

A serious fault of most industrial pension plans is that they are not portable. A person can work for a number of years for company A, then for company B, then company C. At retirement, this person may qualifiy for at three or fewer small pensions. Many companies have a vesting requirement in their pension plans; that is, you must work at the company a certain number of years (usually five, but ten in a few companies) before you are eligible for a pension.

There has been some talk in Congress about making pensions portable; that is, one can take the money invested in the plan with you when you change jobs. One difficulty with that is that different companies have different levels of benefit and different schedules of payment into the plan.

A better idea is to set up a national non-profit company to provide pensions for all indusstrial and service workers. An example of such a company is TIAA, the Teachers' Insurance and Annuity Association. Most universities allow their teaching employees to enroll in the TIAA plan instead of setting up their own pension plan. The teaching employee and the university both deposit funds into the TIAA plan. I worked for five years at two universities, both of which subscribed to the TIAA pension plan. As a result, I receive a small pension from TIAA for my five years of service to the universities. If my service at all the other places I have worked had been covered by the TIAA pension plan, I think I would now be quite a bit better off financially than I am.

Let's agitate for a national pension plan to replace all the different company and union pension plans!
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