In the U.S., public pensions were initially reserved for people who were wounded or spouses of those who died while serving in the military. After the Civil War, the restrictions loosened, and private pensions took off around the same time, especially in railroad construction. By the time FDR signed the Stabilization Act of 1942 and froze wages in an attempt to control inflation, pensions were downright popular.
(By contrast, the 401(k) wasn’t invented until the late ‘70s.)
Throughout history, pensions have been a way for employers to attract workers, especially when the labor market is tight. A pension plan is a sweet deal for an employee because they get a guaranteed, regular payment once they retire — no worrying about market risk or losing track of old 401(k)s. And because that check is usually bigger the longer a person stays at a job, pension plans help improve retention.
Alas, Cassandra Rupp, a financial advisor with Vanguard, says pensions have fallen off in recent years.
Private-sector companies have wisened up to the fact that it’s really expensive to provide for all their employees throughout retirement. These days, pension plans are more common in public service — think federal employees, government workers, teachers, law enforcement, etc. This is especially true in industries with high unionization rates because workers make it a priority to bargain for pensions to be included in their contracts.
Pension plans have a few downsides, too.
Interestingly enough, the biggest “con” is the same as the biggest “pro”: It takes saving for retirement out of my control. It forces me to take a leap of faith that my employer will still be around and in good shape by the time I retire in 30 years.
Pearson points out that there are safeguards in place in case of bankruptcy: Employers’ retirement plan assets are supposed to be kept separate, held in trust or insured, meaning they’re protected from creditors. Failing companies can also sell their pension plans to an insurance company. In these scenarios, payments don’t disappear entirely, but they can decrease.
Another drawback is that I generally need to spend a significant chunk of time at the employer in order to unlock a nice pension payment — hopping from job to job every few years, like us millennials tend to do, isn’t gonna cut it.
As a result, it’s risky to put all my eggs in a pension basket when it comes to retirement planning. If I do get a pension plan, I should probably look into setting up an IRA and personal investment account(s) alongside it so I do have money that I control. Plus, these accounts will be significantly easier to access for stuff before retirement — like buying a house — than a pension.
“I wouldn't 100% rely on any future payout,” Rapp says. “It’s always good to plan outside of any income streams you think you'll get.”
