What_Happened_to_the_Pension

Whatever Happened to the Pension?

On the one hand, we have less financial security in retirement. On the other, we’re less trapped in our jobs than we used to be.

Once upon a time — like, until the 1980s — lots of employees could spend their lives working for a company, then enjoy a cushy, well-funded retirement beginning around age 60. That’s because they had pensions waiting for them at the end of the rainbow — which was once a pretty common company benefit.

So, what happened to it? What was it actually like? How’d it work? Will it ever come back? Alongside Geoffrey Sanzenbacher, associate professor of economics and research fellow at Boston College’s Center for Retirement Research, we drew some answers.

How come nobody in the private sector gets offered a pension anymore?

There are two views of what happened, according to Sanzenbacher, though it’s hard to tell what’s more true. One is that the tax code changed in 1978, allowing for the existence of 401(k)s, in which the employee pays into their own retirement fund (with contributions from their employer). As you can imagine, 401(k)s handed more risk and responsibility to the employee and took a lot off the hands of the employer, so it was better for the companies to offer this rather than a pension. 

The other view, Sanzenbacher says, is that employees gradually became more mobile, and therefore a pension — which takes decades to accrue serious benefits that only really build up toward the end — was becoming sort of obsolete. In other words, earning a decent retirement meant you had to work somewhere for a very long time (more or less your whole working life), which is something people have wanted to do less, and thus the 401(k) is better for an employee, too.

“Those are the two different stories that are out there, and we’ve never really been able to figure out through research which one it is, because those two things were happening simultaneously,” Sanzenbacher says. “My guess is it’s probably a little bit of both, but that employers really valued the opportunity to take risk off their book.”

So pensions are pretty much all gone?

They’re around for public employees — usually city, county and state workers. Federal employees have a hybrid system, according to Sanzenbacher, that includes a pension but also a 401(k)-type plan called a Thrift Savings Plan (TSP). Employees hired before 1987 got a pretty generous pension. After 1987, they got a less-generous pension but also the TSP, which is quite generous, he says — together it adds up to something roughly equal to the old days.

In these old days, did employees have to pay anything into it, like people have to with their 401(k)s?

Generally, no! At least not directly — they may have been earning less in wages to make up for it, but they didn’t have to put in their own money. How much you earned in retirement each month was a function of your salary, your retirement age and how long you were with the company. In public sector pensions, employees typically do pay into them now.

How rare are pensions nowadays?

Check out this graph from the Center for Retirement Research and see for yourself (“Defined Benefits” means pensions and “Defined Contribution” means a 401(k)-type plan). They’ve basically inverted since 1983. Only 12 percent of all workers with retirement plans had a pension in 2016.

How many people had a pension in ye olden days?

Sanzenbacher says it wasn’t like everyone had one — about half of all workers did, which holds kinda true today: about half of all employees have a 401(k) plan.

Were people really able to retire comfortably on a pension?

With a pension and Social Security checks, generally, yeah. It’s tough to say because, to get a good pension payout, you had to stay at the same job for a long time and work till your 60s, and Sanzenbacher says there’s not much data on how many people were able to pull that off. But if you did? Yeah, your golden years were pretty cush.

“It’s always important to remember that, that wasn’t everybody even back then,” Sanzenbacher says. “Like everything, it was unequal, and the people with better benefits would typically be higher-income to start with. But in general, the people who stayed at their job a long time would be in good shape.”

What’s the current state of public employee pensions?

Not great! They vary widely from decent to terrible shape, though right now, on average, they’re vastly underfunded. This sort of thing tends to correlate with the economy (until recently). So for example, in 2007, about when the economy got shitty, they were, on average, funded at 86.5 percent. But back in 2000, at the crest of an expanding economy, they were funded at 102.7 percent. 

Here’s the bad news: Right before COVID, at the end of a long, red-hot economic expansion, when you’d expect pensions to be well-funded, they weren’t: They were at 72.8 percent. “We had a 10-year expansion before 2000 and everything looked great,” Sanzenbacher says. “We just had a 10-year expansion and everything looks bad! So that’s not exactly encouraging for the future.”

How did that happen? 

Maybe because the Trump Administration and Congress gave corporate Amer- whoops, I mean “the middle class,” one of history’s largest tax cuts in the middle of an economic expansion in 2017, for some deeply mysterious, forever-unknown reason.

Ugh. So like, with a pension, you’d basically get a paycheck till you died?

Yes! And possibly also survivor’s benefits for your spouse. This is another reason pensions dried up: People’s life expectancy has soared. It’s one thing to live a few years after you stop working; it’s another to keep on keeping on for decades, getting paid every 30 days and draining your old company’s pension fund. 

Sounds amazing, though.

It probably was — Sanzenbacher would like to see 401(k)s have more of an annuitized structure like pensions, as most people suffer from a bit of paralysis in retirement: They’ve saved and contributed to their 401(k) for so long that they become emotionally attached to it and hesitate to spend it. We get conditioned to receiving a paycheck every month for decades and spend/saving accordingly, but then, when we need to ration out a chunk of money for an unknown amount of time, with unknown expenses on the horizon, that’s a totally different skill!

Are pensions ever gonna come back?

Nah, probably not. Sanzenbacher points out that they used to serve a couple purposes for employers that no longer apply so much. One thing they did was retain employees, encouraging people with company-specific knowledge to stick around. That’s one reason pensions are so heavily back-loaded, accumulating value toward the end, in a nonlinear fashion. But then, since many jobs used to be more physical and involved manual labor, employers didn’t want workers sticking around forever, past the peak of their productivity. So the value of one’s pension also stopped accruing at some point; that allowed workers to retire and claim their full benefit without the need to work anymore. All of which is to say that pensions retained employees for the right amount of time, and also got them to leave at the right time. 

But now that dynamic has changed: Employees don’t want to necessarily stick around for that long (nor, perhaps, should they), and companies realized that pensions are both a risky and expensive way to retain employees (in its place, helloooo ping-pong tables, all-you-can-eat snack bars and relaxed dress codes!). Instead companies realize they can still seem generous enough by offering a 401(k) — which is nice indeed! But it’s not quite a pension.

So while, on the one hand, you’re more on your own than ever when it comes to your retirement someday, at least you no longer have to dedicate the only life you have to a job you freaking hate in order to live the last of it in comfort.