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Why You Should Understand Pension Plans Now

It’s Never Too Early To Understand How Retirement Plans Work

Economic upheavals, petty politics, and home-state budget cuts are often cause for retirees to become anxious about the best ways to protect their pensions, and in an era of much uncertainty, some retirement plans prove to be better than others.

Retirement plans typically fall into two categories: defined benefit (DB) plans and defined contribution (DC) plans. With a DB plan, people know what to expect money-wise when they retire—no matter what’s happening around the state or country. These plans provide a defined, predictable, guaranteed benefit, usually based on factors such as age, earnings, and years of service. DC plans, where employers contribute a certain amount, offer no guarantee or predictable retirement benefit, and are subject to the impulses of the stock market.

But the experiences of three educators—two retired and one active—show how DB plans are the best.

“I didn’t worry about retirement when I was teaching because I had a defined benefit plan,” says Steve Mockus, a retired science teacher from New Jersey who now resides in Florida. “I knew what to expect.”

That wasn’t the case of some of Mockus’s Florida neighbors who didn’t have traditional group pensions.

“They are 70 years old and working at the grocery store,” he says. “Not having the right pension plan has forced them to come up with other means of income.”

Sidney Kardon feels secure with his DB plan. It’s the politicians he’s worried about. They often make big promises to maintain and fund pensions but don’t deliver, he says.

“Some of our elected officials have failed to live up to their obligations to fund workers’ pensions,” says Kardon, a retired social worker from Royal Oak, Mich. “Such decisions often lead to bad outcomes for educators covered by the plan over time, and can also be used as an excuse to shut down the plan for the next generation.”

Teacher Jake Todd of Alaska is not looking forward to retirement. While defined benefit plans are still in place for Alaska teachers who had them as of 2006, new hires like Todd were offered a retirement plan that carries high investment risks and no lifetime guarantee.

“I didn’t become a teacher to get rich, but I would like to know that I’ll be secure when I retire,” says Todd, who dreams of getting married, buying a house, and some day retiring in Anchorage.

Future retirees may have cause to worry. Some politicians, like New Jersey Gov. Chris Christie and Kentucky Gov. Matt Bevin, favor closing pensions to the next generation of educators by moving to DC plans. This has become somewhat of an ideological issue, with practical outcomes often ignored. 

Nationwide, NEA is a strong advocate for the protection of DB plans, which provide a secure retirement for participants and their spouses, and typically offer other protections like disability insurance.

With the benefit of stronger investment returns, lower fees and longevity risk pooling, DB plans are able to provide these benefits at about half of the cost that would be required in a DC plan.

While you may not be ready to retire yet, it’s certainly worth thinking about now and speaking out in support of smart choices for a secure retirement—for retirees today and the next generation of educators!


Ready for Retirement?

Half of All Americans Haven’t Saved Enough

The key to a secure retirement is a defined benefit or DB plan. These are traditional pension plans, in which employees and employers invest, and the participants know exactly the benefit they’ll get each month in retirement, based on a formula that includes years of service. Much less secure are the alternative retirement plans that have been urged by many in the financial sector, and supported by lawmakers who have pushed forward state budgets that fall short of their fair share for public employees’ pensions. The main alternative is defined contribution (DC) plans, like 401(k) plans, in which the money available to retirees can vary greatly, depending on the timing and severity of market booms and busts, how much has been put aside, fees paid to Wall Street, and whether these accounts are tapped before retirement. These do-it-yourself plans, which transfer the burden of planning from the employer to the employee, are very risky—and guess what?

The risk is on you!

Picture this:

A 25-year-old teacher earning $30,000 a year, invests 10 percent of her paycheck into her retirement, and retires at age 60. Whether or not she’ll be able to comfortably afford her mortgage, heating bills, and groceries will depend greatly on her type of retirement plan: DB or DC?*

DB DC

(pension plan)

Her annual pension will provide about one-half of her last year’s pay.

(401[k]-style plan)

Her annual pension will provide about one-quarter of her last year’s pay.

 

What can you do?

In a few states, employees have a choice between DB and DC plans: Make the smart choice for a secure retirement. In other places, especially where lawmakers have not been responsible, it’s critical to advocate for full funding. Finally, don’t allow elected leaders to sell out the next generation of educators! Check with your NEA state affiliate to learn more and join the fight for retirement security.

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Published In

1-Feb-17

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