Private Pension Programs

Sources of income for older couples and individuals in 1994 included Social Security (42%), followed by other public and private pensions (19%), earnings (18%), asset income (18%), and other sources (3%) (American Association of Retired Persons, 1996b). As indicated by these percentages, private pensions are not the major source of income for older Americans, but they are a substantial one: In 1995, 8.8 million Americans received an average of $8,378 under the provisions of company or union pensions. Annuity, IRA, Keogh, 401(k), and other private pension plans also made payments to nearly 1 million Americans (U.S. Bureau of the Census, September 1996).

Business and professional organizations in most industrialized countries provide private retirement programs for their employees. Under these programs, retirees are either given monthly payments or, in countries such as Australia and Japan, a single lump sum. In the United States, private pension plans can be divided into two types: defined-benefit and defined-contribution plans. The provisions of a defined-benefit plan promise the employee a specific monthly retirement income when he or she reaches a certain age and has worked in the organization for a certain number of years. The benefit amount is calculated from a prescribed formula, for example, a percentage of final salary times years of service. Approximately 80% of private pension plans are of the defined-benefit type, which are found mostly in large industries. An alternative is the defined-contribution plan, under which a certain percentage of the employee's earnings is deposited into a tax-sheltered account every pay period by both the employee and the company. The funds are invested and accumulate during the employee's tenure with the company, the total value of the account fluctuating with the financial markets and any amounts accrued from profit-sharing plans. For this reason, in contrast to the fixed retirement benefit of the defined-benefit plan, the retirement benefit under the defined-contribution plan is variable. Defined-contribution plans, which are more common in smaller, nonunion firms than in larger, unionized organizations, can also be combined with a defined-benefit plan, making a portion of retirement income predictable and a portion unpredictable.

Private pension plans cover only about one-third of retirees in the United States, usually those who have worked for large corporations. Women, whose work histories are often interrupted for family reasons, are less likely than men to qualify for private pensions, and those who do usually receive less than men. Furthermore, many people—women and men—fail to receive a private pension because they do not stay with the company long enough to be considered "vested." Making such plans "portable" from one company to another increases the retirement incomes of women, minorities, and unskilled workers who tend to remain on a particular job for a relatively short period of time. However, private pension plans can be expensive both to workers and organizations, so the cost of increasing the number of eligible employees and the size of benefits must ultimately be borne by consumers of the products or services provided by those organizations.

Your Retirement Planning Guide

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