Financial
Pension Plans
Income from such plans is an important factor in determining whether retirees can maintain their pre-retirement standard of living. Unfortunately, 48 percent of retirees do not receive pension income. These people tend to have lower incomes. Specifically, about 21 percent of retired people without pensions had incomes below the federal poverty level, compared with 3 percent with pension income. The proportion of workers covered by pensions has not increased substantially since the 1970s.
Most workers lack pension coverage because their employers simply do not sponsor a plan. Some firms choose not to sponsor pension plans because of the costs associated with funding and administering a plan. These costs are especially hard on small businesses, which are less likely than medium and large employers to sponsor pension plans. Small businesses may face cost pressures that can affect their ability to offer compensation packages that compare with those offered by larger firms. Other employees lack coverage because they are ineligible for their employer's plan due to age, service requirements, or job classification. Finally, some employees choose not to participate in an available plan due to various personal reasons.
Pension plans are customarily classified into two major categories: defined benefit plans and defined contribution plans. Defined benefit plans provide a level of retirement income that is generally based on salary and years of service. Defined contribution plans are based on the contributions to and investment returns on individual accounts. Since the 1980s, there has been a significant shift from defined benefit plans to defined contribution pension plans. Growth in defined contribution plans outpaced defined benefit plans on every major measure of comparison between 1975 and 1997: assets, benefits paid out, active participants, and contributions. 401(k) plans are the fastest-growing type of defined contribution plan. Many employers sponsor both types of plans, with the defined contribution plan supplementing the defined benefit plan. Most of the new pension plans adopted by employers, however, are defined contribution plans.
Updated: November 2, 2007
