The Power of Pensions

I spent Labor Day weekend attending a seminar at the North Carolina Center for Creative Retirement. For three days, a group of 40 retirees and almost-retirees discussed their fears and fantasies about post-work life. In a previous article (What Will You Do in Retirement?), I wrote about how many participants had some anxiety about leaving their careers -- their accomplishments, their social networks, their identities -- behind.

But here's something that most of the participants didn't fear: That they'll run out of money. For some, that was a result of their higher incomes. But for others, their retirement will be secure because they worked for years for an employer that offered a defined-benefit plan (i.e., a traditional pension). For their service, they will receive a monthly check for the rest of their lives, regardless of bear markets, Wall Street scandals, and terrorist attacks.

However, fewer and fewer Americans will be able to rely on a pension check. In 1986, 172,642 companies offered traditional pension plans, according to the Employee Benefit Research Institute. By 1998, the number of companies sponsoring defined-benefit plans had shrunk to 56,405, a 67% drop in just 12 years. The number of plans insured by Pension Benefit Guaranty Corp. (PBGC), which insures the benefits of private pension participants, dropped from 39,882 in 1999 to 32,321 in 2002, a 19% decline.

Of course, just having a pension doesn't guarantee you'll get what you've been promised. As airlines such as United, U.S. Airways, and Delta (NYSE: DAL  ) threaten to stop funding their defined-benefit plans, thousands of employees fear for their retirements.

As defined-benefit plans die out and more companies foist their responsibilities on the PBGC, the retirement prospects of many Americans will severely suffer. I wish it weren't the case. I wish we didn't need pensions; I wish we all saved for retirement and we all made good decisions. I certainly wish that, during the five years I was a teacher, 6% of my salary was contributed to a 403(b) instead of the school system's pension plan. But as we all know, we don't always do what's best. Even seasoned investors make big money mistakes. By moving away from traditional pensions, America places all the risk on the individual investor -- yet doesn't find it necessary to teach personal finance in school.

In the past few weeks, I've written about why I hate Social Security and why readers hate, and like, Social Security. On a personal level, I don't like the idea of someone taking my money and giving me a low rate of return. But on a societal level, I recognize the need for a safety net -- a source of retirement (and disability) income that is safe from our bad habits, inability to delay gratification, and misplaced faith in some investments.

All beneficiaries of defined-benefit plans should regularly take the pulse of their pensions. You can start by reading this article. Also, get specific information on your pension plan from the Summary Annual Report and individual benefit statement.

If your pension fails, it will be covered by the Pension Benefit Guaranty Corp. However, your benefit may be reduced. On a related note, the PBGC announced it is looking for 26,000 people who are owed benefits but can't be located. Enter your name in the PBGC online search at and see what turns up.

Robert Brokamp is the editor of the Motley Fool Rule Your Retirementnewsletter service.

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