Pension

Author:Jeffrey Lehman, Shirelle Phelps
 
INDEX
FREE EXCERPT

Page 419

A benefit, usually money, paid regularly to retired employees or their survivors by private businesses and federal, state, and local governments. Employers are not required to establish pension benefits but do so to attract qualified employees.

The first pension plan in the United States was created by the American Express Company in 1875. A few LABOR UNIONS and state and local governments began to offer pension plans shortly thereafter, and by 1935 governments in half the states and many businesses were offering pension plans. In 1997 about half of all U.S. workers had pension plans.

Employers establish pension plans by paying a certain amount of money into a pension fund. The money paid into this fund is not taxed to the employer, and it is not taxed to the employee until the employee retires and begins to collect pension benefits. The employer gives control of the pension fund to a trustee, who may invest the money in stocks and bonds and other financial endeavors to increase the fund. Some pension plans require the employee to make a small, periodic contribution to the fund.

The amount of pension that a pensioner receives depends on the type of pension plan. Pension plans generally can be divided into two categories: defined benefit plans and defined contribution plans. A defined benefit plan provides a set amount of benefits to a pensioner. Under a defined contribution plan, the employer places a certain amount of money in the employee's name into the pension fund and makes no promises concerning the level of pension benefits that the employee will receive upon retirement. Employers using defined contribution plans contribute an amount into the pension fund based on the employee's salary. As a result, higher-paid employees receive larger pensions than do lower-paid employees.

The same is true for defined benefit plans: employers tend to offer larger pensions to higher-paid employees. The difference between the two types of plans is that in a defined contribution plan, the employee assumes the risk of investment failure because the funds are not insured by the federal government. Under most defined benefit plans, the employer assumes the risk that pension funds will not be available. Employees assume little risk because most funds are insured by the federal government to a certain limit.

The most important issue to pensioners is the potential loss of their pension benefits. This issue is of less concern when the government is the employer because governments have access to additional funds. Such is not the case with private businesses. Before the 1970s employees did not always receive their promised pension benefits. An employee could lose his or her pension if the...

To continue reading

FREE SIGN UP