Pension vs. 401(k): A Look at Your Retirement and Money

A June 13, 2004 article in The New York Times by Mary Williams Walsh investigated the current state of retirement benefits. In case you missed it, here’s a summary of what she found:

The pros of pensions

Walsh finds that, generally speaking, pensions are worth more than the typical 401(k) account. She acknowledges that her view contradicts several studies, but contends that these studies’ results are skewed by wealthy households whose hefty retirement accounts slant the averages that are compared with pensions.

Walsh is also in favor of pensions because they seem to have an equalizing effect between the middle and upper classes: "Companies that offered [pensions] had to use the same pension formula, involving years of service and salary, for all workers in a plan; otherwise, the companies risked losing their tax break. The rich in those days bought big houses and invested in stocks and other assets that were out of reach for the middle class. But pensions would offset, to some degree, the difference between how these groups lived in old age." Walsh goes on to say that the switch from pensions to 401(k)s is creating a retirement class gap in which the wealthy are prepared to retire and everyone else is not.

However, even traditional retirement plans favor wealthier people, since the size of the benefit is based on the size of the salary.

Walsh argues that pensions are more efficient than individual retirement accounts. She suggests that managing a collective fund requires fewer money-management fees and brokerage costs than do a lot of separate accounts. Further, Walsh reminds readers that employees who die before they collect benefits help to pay for everyone else in the pool.

The cons of pensions

One reason for employers to drop pensions is complex federal regulations that can take years to improve, even when drastically outdated. She says, "It took two years for Congress to make just a single modification in the pension rules, changing an interest rate that companies use when calculating pension values. Pension advocates say that Washington tends to react only in a crisis..."

Employers also favor 401 (k)s because they are predictable. They can pay 3% of payroll, for example, year after year. It doesn’t matter what interest rates are doing, the amount is the same. The costs of traditional pension plans, on the other hand, are variable, based on things outside the control of the corporation - mostly interest rates.

Also, pensions aren’t compatible with contemporary workers’ tendency to change jobs several times over the course of their career. Usually, employers require at least a decade of service for substantial pension benefits to kick in; often, employees have to work 20 to 30 years to qualify for pensions.

The pros and cons of 401(k) accounts

Unlike pensions, 401(k)s fit the flexible modern workplace by allowing workers to roll them over to their next job. 401(k)s are also easy to measure - their value is better understood by the worker since it is a dollar amount and not an equation. Since 401(k)s are managed by the worker, they can better fit the employee’s plans for retirement.

However, if 401(k)s are worth less than pensions as Walsh suggests, workers may be forced to retire later and may have a less comfortable retirement.

The state of retirement

Most of the workers that Walsh interviewed had several retirement options going at once. Many had pensions from previous jobs along with 401(k)s from current jobs in addition to real estate investments, and all of these put together would make retirement possible. With traditional pensions on the decline, most employees will have to have this kind of diversified plan if they hope to avoid working through the golden years. Walsh notes that The Society of Actuaries reported a sharp increase between 2001 and 2003 in the number of people who claim that they will never be able to retire.

While Walsh’s piece is certainly a valuable analysis of retirement, it is based on the notion that retirement studies are flawed because they are missing a valuable part of the retirement equation - pensions, or lack thereof. But these studies and Walsh herself leave out a factor that could be even more important. Healthcare.

As employer-sponsored health benefits decline along with pensions, retirees and to-be retirees are put even more at risk. Having a pension, a 401(k) and investments may not be enough if you don’t have adequate health coverage. Some seniors could spend their monthly pension check on the cost of prescription drugs alone, even with the new Medicare benefits. To get a truly accurate picture of retirement, Walsh needs to factor in these concerns.

More on retirement

For information on healthcare, please see our Healthcare Life Issue, where we explore health benefits and retirement, along with other healthcare issues. For more on pensions, including corporations’ under-funding of pensions, click here.

To discuss retirement benefits with other WomenMatter readers, log on to one of our online forums. If Jobs, Taxes, and Benefits are important issues for you, sign up for an e alert, and we’ll keep you posted. And don’t forget to register to vote and contact your representatives, because your voice matters.

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Article Posted on: 6/22/2004