For many years, companies often provided workers with a pension plan, a valuable benefit that set them up with a steady source of guaranteed income during retirement. These days, fewer employers offer a pension: Only 15% of private industry workers had access to one in 2022, according to the Bureau of Labor Statistics.
Retirement plans that rely on employee contributions and the rate of returns on their investments are more prevalent today. According to the BLS, 69% of private industry workers had access to such plans in 2022.
Why are pensions less common? Consider the following:
- How pension plans work.
- Understanding why employers used to offer pensions.
- Changing times: the shift from traditional pension plans.
- Contemporary factors contributing to the disappearance of pensions.
- Alternatives to traditional pensions in modern workplaces.
- Exploring the consequences of disappearing pensions.
- The outlook for pension plans.
How Pension Plans Work
Also known as defined benefit plans, pension plans are a retirement benefit that companies set up for employees. Employers commit to putting a certain amount into a pension fund for workers during their years of service, which those former employees receive as income in retirement.
“There are different terms for how long you have to work to receive a pension and how old you have to be to access the pension funds,” said Tyler Johnson, a senior financial advisor at StillWater Financial Advisors in Charlotte, North Carolina, in an email. Companies also make decisions regarding how the funds will be invested.
When the employee becomes eligible to receive pension benefits, “companies usually give the option to take a lump sum, which means cashing out their pension, or an annuity over the employee’s lifetime with agreed terms,” Johnson said.
With the annuity version, the former employee typically receives a monthly amount and cannot access the pool of funds. If an employee takes a lump sum distribution, they may decide to roll it over to a tax-sheltered account and then decide how to invest the funds. They can also make withdrawals over time.
Understanding Why Employers Used to Offer Pensions
In the past, companies often offered pensions as a workplace benefit to attract and retain workers.
“It was a way of retaining trained and skilled employees for a lengthy career,” Johnson said. “Employees who felt they could rely on a pension benefit after a certain amount of years of service were more likely to stay with a company until pension milestones were achieved.” This also enabled employers to save on hiring costs.
Changing Times: Shift From Traditional Pension Plans
According to the BLS, pension plans covered about half of all private-sector workers in 1960.
“Companies started moving away from pension programs in the 1980s, mainly due to the high costs and because it is simply unpredictable to know how long the company will need to make payments to each retiree,” said Michael Arvay, founder and CEO of Marvelous Retirement Planners in Toledo, Ohio, in an email.
Companies offering pensions also dealt with increasing complexities involved with managing the funds and recordkeeping. “As more scrutiny and oversight was placed on pension funds, companies started to shy away from offering the benefit and opting for a more hands-off defined contribution plan,” Johnson said.
Unlike defined benefit plans, defined contribution plans are made up of funds that employees contribute to their accounts. Companies can make contributions as well and might commit to matching employee contributions up to a limit. “By matching employee contributions up to a certain level, it was easier for companies to budget the dollars and then be removed from future responsibility to the employee,” Johnson said.
Contemporary Factors Contributing to the Disappearance of Pensions
In the past, employees may have stayed at one company for decades. But today, they tend to change jobs more frequently. One in 4 employees said they would likely change jobs during the next 12 months, according to the 2023 PwC Global Workforce Hopes and Fears survey.
The aging population has also strained traditional pension plans, according to the 2023 Allianz Global Pension Report. Longevity is expected to rise to a global average of 77.2 years by 2050, according to data from the report. This is an increase from a global average of 73.4 years in 2023.
Alternatives to Traditional Pensions in Modern Workplaces
These place more responsibility on employees as they plan their retirement, and individuals make choices regarding their investments. The payouts retirees receive are based on how much they contribute as well as how their investments perform over time.
Exploring the Consequences of Disappearing Pensions
Workers who were expecting to receive lifelong payments for working at a company may need to rethink their retirement strategy and consider other ways to generate a steady income stream. For many, this will include benefits from Social Security and their savings. They may also count what they will receive from their defined contribution plan as one element of their overall income strategy.
The Outlook for Pension Plans
Some employers may still consider a pension plan as a way to attract workers.
“HR needs, and the need to become an employer of choice in certain industries with labor shortages, have increased over the past few years, and that has inspired employers to showcase enhanced benefits programs as a key differentiator,” said Michael Marks, senior vice president at the Segal Group, a benefits and HR consulting firm in New York. “Employers have more robust tools available for managing defined benefit plan costs and risks, both on the benefits or liability side as well as on the asset side.”
At the same time, workers in many industries need to plan for their own retirements. “When it comes to savings, take the time and diversify your retirement,” Arvay said. “It’s important you don’t just rely on pensions and costly 401(k)s.” You might explore other options such as Roth IRAs or continuing to earn income in retirement.