Pension vs 401K

A pension by definition is a guaranteed monthly retirement check for life. These were popular in the post war era but have been replace by 401K plans starting in about 1970. The number of people under pension plans have declined from 27 million in 1975 to 13 million in 2019. The only groups that maintain regular pension plans are some unions, federal, state, county workers and teachers. The private sector abandoned pensions in favor of 401K plans because they were less costly. A retiree with a pension plan has a benefit 50% higher than one with a 401K plan. In time the public sector will have to move away from pensions and toward 401K plans because there is not enough money to pay the retirees under the present public pension system. When there is not enough money to pay the promised benefits to future retirees it is called underfunded. The 1974 Employee Retirement Income Security Act (ERISA) was designed to prevent underfunding, so what happened. Go back 40 years and you are setting up a pension plan. You have to decide how many employees are going to stay with your company for the next 40 years. You must determine how much their salaries will be over the next 40 years. You must determine what life expectancy will be in 40 years. You must decide how much you must put into the pension account and how much that money will earn in the future. Because this is such a daunting task, ERISA said that the pension fund must be audited each year to make sure enough money is being added to meet future commitments. If the company decides to spend some pension contributions on another project, they would make up the difference by projecting a higher rate of return on the pension fund and therein lies the loop hole. Here is info from Google AI: Research and data from financial analysts indicate that many pension fund managers, particularly for public plans, have consistently projected ambitious or unrealistic rates of return to mask the extent of underfunding and keep employer contributions artificially low. One particularly egregious state is Illinois. They have only 49 cents in their pension account for every one dollar promised. Can they recover by adding more money? Yes, but if they added one million dollars per day extra it would take 600 years to recover. The small population state of North Dakota had to add $49 million last year to the teacher’s retirement fund to maintain benefits. When Detroit filed bankruptcy, they cut benefits to existing pensioners. Is that the future of pension plans.