The Importance of Your Pension
NRTA PENSION
EDUCATION TOOLKIT
There has been a lot of talk in the media recently about
retirement insecurity. For a while now, reporters have
been talking about how pensions are “disappearing” and
being replaced by 401(k) plans. Then, with the recent
economic downturn, many Americans’ retirement
savings accounts took a big hit.
You may wonder what this means for your retirement
security. The good news is, for those who have earned
the guaranteed lifetime benefits provided by group
pension plans, you are in a far better position to weather
the tough economic storms that come your way.
According to calculations by researchers at Boston College
and at NIRS, the retirement savings gap – the difference
between what American households will need to save for
retirement and what they are on course to save – is almost $7
trillion based on household net wealth, including appreciated
housing values. American workers are therefore right to
be anxious about their retirement security in the current
economic environment. And only a mere 2% of Americans
believe that it will be easier to prepare for retirement in the
future.
1
Older low- to middle-income workers, in particular, are
facing a daunting financial challenge recovering from the
Great Recession while preparing for retirement. Indeed,
37 percent of the middle-income workers age 45–54 are
projected to be downwardly mobile to lower income status in
retirement, based on a study by the Urban Institute.
2
All told,
9 out of ten workers fall short of target retirement savings
Your pension plan is
important because…
• The traditional and best
approach to achieving
retirement security
consists of a pension,
Social Security, and
individual savings. Your
pension helps you to
maintain your standard of
living in retirement, and
savings provides important
supplemental income for
unforeseen expenses.
• Group pension plans
provide guaranteed,
monthly income for life,
which makes financial
security in retirement much
more achievable for those
who have them.
• Not surprisingly, almost
all Americans still want
pensions.
• Pensions are an
economically efficient way
to fund retirement, which
means they are a prudent
use of taxpayer money.
• Pensions also help to boost
local economies, especially
in tough economic times.
The Current State of Retirement
Security in America
NRTA Pension Educaon Toolkit | Your Pension and You 2
benchmarks designed to allow older Americans to maintain their standard of living prior to reaching
typical retirement ages.
3
There are several reasons for this increase in retirement insecurity in America beyond the economic
downturn. First, roughly 78 million American workers (both public and private) have no access to any
retirement plan at work – the most effective way to save for retirement. Few of these individuals save for
retirement on their own, and many will retire, with less than enough money to meet their basic needs.
Moreover, in the private sector, and over the last few decades, many companies who do offer retirement
plans have been getting rid of their group pension plans and replacing them with individual savings plans,
like 401(k) plans.
4
Individual savings plans, like 401(k)s, were not originally intended to serve as the
primary source of retirement income for individuals. These plans started out as supplements to group
pension plans—and are still very effective as such – but are more suited to provide the additional income
that may be needed for retirement, or to deal with extraordinary life events—like an unexpected health
crisis, the loss of a spouse, etc.
The typical working-age household has only $3,000 saved in retirement accounts, while the typical near-
retirement age working household has just $12,000 saved.
5
To put this amount of retirement savings
into context, even the near-retiree savings amount is less than the modest average annual Social Security
benefit earned by retired Americans of $15,190.
Due to the above factors, as well as stagnating income, escalating personal debt and rising costs for
education and health care, workers today are less likely than their parents or grandparents to enjoy the
living standards of their working years when they retire. If these trends continue, Social Security (for those
who participate in the program) will be the main source of income for all but retirees in the top one quarter
of retiree income levels.
Retirement researchers have long acknowledged the importance of Social Security benefits, defined
benefit (DB) pension income, and supplemental individual savings—in providing Americans the greatest
opportunity to achieve financial security in retirement.
6
Each leg of this stool fills a specific, unique purpose.
Social Security provides a guaranteed, cost-of-living
adjusted income for life in retirement, and has proven
to be an effective way to keep older Americans out of
poverty.
7
It is the foundation of retirement security
for millions of Americans and their families.
Yet Social Security was never meant to be the sole
source of retirement income for American workers.
And, in fact, as many as 30% of state and local government
employees do not participate in Social Security at all.
8
The
second component—group pension plans—is also extremely
important in providing a reliable, steady source of income in
Social
Security
Benets
Dened
Benet
Pension
Supplemental
Individual
Savings
The Best Way to Achieve Retirement Security
NRTA Pension Educaon Toolkit | Your Pension and You 3
Amount of
Money in
Retirement
The monthly benefit is
determined by a set calculation—
usually based on years of service
and pay at the end of one’s career.
The money available in
retirement is simply the amount
that one has accumulated
in the savings plan, through
contributions and investment
earnings.
Pensions Provide Guaranteed, Monthly Income for Life
retirement. And for those retirees without Social Security, a pension may represent their only source of
guaranteed, inflation-adjusted monthly income, making their pension all the more important.
The final leg of the retirement stool consists of individual savings. You might save for retirement at work
in a defined contribution (DC) plan—a 401(k), 403(b), or 457 plan, for example. You might also save
in an individual retirement account (IRA), or have other savings. Having individual savings on top of
your pension and Social Security is a helpful way to ensure financial security, especially if you experience
hardships that may be hard to predict, for example, long-term care costs for yourself or a loved one.
Pensions are fundamentally different from savings because you cannot outlive the guaranteed monthly
income provided by your pension. No matter how long you may live, you can be sure that your pension
check will continue to come every month. Savings, on the other hand, can run out.
Also, your pension may provide other benefits as well, such as COLAs, disability protections, and benefits
for your spouse, should you die first.
9
Each of these characteristics is what makes your pension so unique
and so different from defined contribution plans.
Defined Benefit Plan
(Traditional Pension)
Defined Contribution Plan
(401(k)s, 403(b)s, 457s)
Contributions
In the public and private sectors,
contributions are made on
behalf of each employee by the
employer. In the public sector,
many pensions are “contributory,”
meaning that employees also
contribute to the plan out of their
own paychecks.
Employees make their own
contributions to their savings
account at whatever rate they
choose. Often, employers will
make a certain match—for
example, 50 cents on the dollar
up to 6% of pay—but they are
not required to contribute at all.
Investments
Contributions for all employees
are pooled, and invested by
professional asset managers in a
range of assets—stocks, bonds,
real estate, etc.
Employees usually make
all investment decisions
themselves. They can choose
from a range of investment
options offered by the plan.
NRTA Pension Educaon Toolkit | Your Pension and You 4
Pensions Are an Efficient Use of Taxpayer Funds
Another key feature of group pension plans is their pooled nature—meaning that all of the pension
contributions for all workers are put together in the same pot.
This pooled nature is important because it makes pension plans a good value for the money. By pooling
and professionally managing assets, pensions are able to achieve “economies of scale.” (This is the same
reason why shopping at a warehouse club saves consumers money—buying in bulk lowers the price.)
Research has found that a group pension can achieve a target retirement benefit at about half the cost
of individual retirement accounts.
12
So not only do group pensions do the retirement job more effectively than individual savings plans, but
they’re also a lot less expensive to boot—a fact that policymakers and taxpayers alike can take solace in.
It is important to note that many Americans do realize
just how important pensions are. With the trend away
from pensions in the private sector, it seems more and
more Americans are anxious about retirement—and are in
favor of having a pension.
Recent public opinion research has found…
• More than eight out of ten Americans are worried about
their ability to retire.
• 80% believe that the decline of pensions has made it
more difficult to achieve the American Dream.
• More than eight in ten Americans would participate in a
“new” pension system, if offered.
• 82% of Americans believe that all workers should have a
pension plan.
9
So, it’s not just that middle-class Americans need pensions.
It seems most Americans want pensions, too.
11
Americans Want Pensions
Private Sector Public Sector
Active U.S. Workers with a Group
Pension Plan, in millions 2009
10
17.9
million
14.6
million
Payout in
Retirement
Payouts are typically provided as
a monthly income stream that is
guaranteed for the remainder of
the retiree’s life.
Plans are not required to offer a
lifetime income payout. Payout
is often a one-time, lump sum
payment.
Supplemental
Benefits
Spousal protections, disability
benefits, and cost of living
adjustments are common.
Supplemental benefits are not
applicable.
NRTA Pension Educaon Toolkit | Your Pension and You 5
Group pension plans are also likely to benefit local businesses in your town. This is because when you
receive your pension check, you probably don’t stuff it under your mattress—you spend it in your local
economy. And the business where you make that purchase sees a boost in its profits. This means that
they may be able to expand their business or even hire more workers.
This simple act of you spending your pension income has very large economic effects. In 2009,
expenditures made out of public pension payments supported more than 6.5 million new American jobs
and over $1 trillion in total economic output nationwide.
13
Those are some huge economic impacts!
So, pensions do a great job of providing modest, secure retirement benefits—and they remain quite
popular among Americans. Public pensions make sense for taxpayers, too, because they are still a good
deal. As if that weren’t enough, pensions also help boost the economy. It’s a classic “win-win” situation
for employees, employers, taxpayers, and local business owners.
1
Oakley, D., and K. Kenneally. Pensions and Rerement Security 2013: A Roadmap for Policy Makers. Washington, DC:
Naonal Instute on Rerement Security.
2
Butrica, B., and M.Waid. 2013. What Are the Rerement Prospects of Middle-Class Americans? AARP Public Policy Instute
Research Report. Washington, DC: AARP.
3
Rhee, N. 2013. The Rerement Savings Crisis: Is It Worse Than We Think? Washington, DC: Naonal Instute on Rerement
Security.
4
It is important to remember that, despite the trend to 401(k)s, public sector workers are not the only Americans who have
dened benet pension plans. In fact, there are sll about 3.3 million more private sector workers with a pension than
public sector workers with a pension.
5
Rhee, op cit.
6
Munnell, A.H., Soto, M., Webb, A., Golub-Sass, F., and Muldoon, D. 2008. Health Care Costs Drive up the Naonal
Rerement Risk Index. Issue in Brief No. 8-3. Chestnut Hill, MA: Center for Rerement Research at Boston College. and
Munnell, A.H., Webb, A., and Golub-Sass, F. 2007. Is There Really a Rerement Savings Crisis? An NRRI Analysis. Issue in Brief
No. 7-11 Chestnut Hill, MA: Center for Rerement Research at Boston College.
7
Engelhardt, C.F., and Gruber, J. 2004. Social Security and the Evoluon of Elderly Poverty. Working Paper 10466. Cambridge,
MA: Naonal Bureau of Economic Research.
8
U.S. Government Accountability Oce. 2007. State and Local Government Reree Benets: Current Status of Benet
Structures, Protecons, and Fiscal Outlook for Funding Future Costs. Washington, DC: U.S. Government Accountability Oce.
9
Almeida, B. 2008. Rerement Readiness: What Dierence Does a Pension Make? Washington, DC: Naonal Instute on
Rerement Security.
10
Pension Benet Guaranty Corporaon. 2012. PBGC 2010 Databook. Washington, DC: PBGC. and U.S. Census Bureau. 2013.
State and Local Government Employee-Rerement Systems. Washington, DC: U.S. Census Bureau.
11
Perlman, B. 2013. Pensions & Rerement Security 2013: A Roadmap for Policymakers. Washington, DC: Naonal Instute
on Rerement Security.
12
Almeida, B., and Fornia, W. 2008. A Beer Bang for the Buck: The Economic Eciencies of Dened Benet Pension Plans.
Washington, DC: The Naonal Instute on Rerement Security.
13
Boivie, I. 2012. Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures. Washington, DC: Naonal
Instute on Rerement Security.
Pensions Boost Local Economies