The Pension Issue

The Pension Issue The term pension can have several meanings which I'll define for you to help you better understand the endless stream of technical terms those in the financial world seem to enjoy manufacturing. This conversation comes from two perspectives - the one of the employee and the one of the business owner.

The first and most common meaning of the term pension is an income that is paid to a worker (typically paid monthly) for services given to the employer after separation from service (hopefully that separation is retirement, not disability, layoff, firing, quitting, outsourcing, moving, etc.) Think of today's retiree's Social Security retirement checks - a form of a pension plan. Most retirees today have some form of pension they are living on, as well as social security. Some were wise enough to have private investments, savings, real estate, etc. to help supplement pensions during the golden years.

My concern moving forward is that many employers have dissolved the pension plan in favor of 'cash balance plans.' The cash balance plan comes in many different flavors and names but some of the one's you'll recognize include 401(k), 403(b), 457, SIMPLE, SEP, Keogh, SAR-SEP, IRA, Profit Sharing, Money Purchase, etc. All these plans are versions of a pension plan but have very different formulas for calculating benefits and contributions. These plans allow a certain number of dollars to be contributed each year, up to some specified maximum and whatever is there in the end, so be it. With the cash balance plan whatever the employee puts in, and perhaps some type of match if the employer feels benevolent, plus any growth or minus any losses will be what is available to the participant upon retirement.

This is a far cry from the traditional pension plan (I'll refer to these as Defined Benefit plans from now on) where after working for a certain number of years you could count of some type of income that, along with social security, was enough to live comfortably on. The contribution formula for Defined Benefit plans is whatever is necessary to assure that the plan will have enough money to fund the benefits promised to workers based on a formula. The contributions allowable here are much higher than any cash balance plan and result in significant tax savings and higher costs for the employer.

Many corporations today don't offer Defined Benefit Plans as they realized as early as the early 80's that these plans were too costly, hurt quarterly earnings and decided to shift retirement responsibility to the employees. Today most government, state and municipal employees have a defined benefit pension plan. These too will be going by the wayside as time unfolds - unless of course you'd like to see your income and property taxes quadruple to fund them. Some private employers still have them too but the trend is moving away from them. The baby boomers, generation X, Y and future generations need to realize that the way our parents and grandparents lived during retirement isn't going to be the same for us. Many promises being made today for our futures - including Social Security - are in danger of not coming to fruition. It is ultimately up to each of us, not the employer or the government to be sure we've got a safe and steady future planned. We're all given that opportunity the only question is have we taken advantage of it.

Business Owner's Perspective
If you own a business, regardless of size, you should consider some type of pension plan. Most business owners I see have most of their assets in the business - necessary to make it run. The pension can be a wonderful tool to help you save income taxes, prepare for your future and reward your employees. If you are the owner of a business without any employees you can set up any type of retirement plan (as long as you've got earned income) and receive tax deductions of as little as $1.00 and as much as $100,000 or more for a defined benefit plan. If you have many employees you may still have a pension plan but need to be sensitive to the type of pension plan you choose. The pension will have certain costs associated with it for your employee's - you cannot discriminate ? if you're making contributions for yourself, you'll likely need to make contributions for the employees. Small employers are well served by pension plans as they give you much needed tax deductions, reward employees with money you would have otherwise paid in income tax and help you secure your future.

The 401(k) and 403(b) have the option of employer contributions and employee contributions to bring the total contribution for the plan, per person up to $42,000.00. For employers who are knocking the cover off the ball they can also establish a defined benefit plan where the contribution limits are only dictated by how much retirement income we can fund for in the formula - $170,000 for tax year 2005. This type of plan can actually allow income tax deductions in excess of your income - that is not a misprint - reread it. You'll actually have no taxable income with the right situation and implementation of the defined benefit plan. You can also put life insurance in many pension plans - having Uncle Sam and Aunt Rell pick up a third or so of your premiums is always a good thing.

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