What is a pension in the USA

Retirement is an anxiety-inducing topic for many. In the US, according to a 2017 census department report, 50% of women and 47% of men between ages 55 to 65 have no retirement savings.

Retirement planning is represented using the three-legged stool metaphor, with each "leg" representing social security, personal savings, and pensions. So, the idea is that if you have all three of those, you're setting yourself up for a good future.

But over time, the retirement stool is leaning heavily toward the personal savings "leg" as increasingly important since social security isn't enough to entirely support retirees — and pension plans are becoming increasingly scarce in the USA as 401(k)s have become the dominant form of employer-sponsored retirement plans.

Pensions are a type of retirement plan where the employer deposits money into it during the employee's time at a company. The amount is calculated based on the employee's salary history and length at the company. Later when the employee retires, the pension offers a monthly source of income until they pass away.

Some especially generous — and especially rare — pensions even offer survivor benefits, which provide the surviving spouse with a percent of the pension money owed to the employee.

The type of retirement plan available to you depends on your employer. Many state and local government jobs, still offer traditional pensions. However, 401(k)s are quickly taking over as the dominant retirement plan for private companies, though traditional pensions are one of several terms that labour unions may fight for in negotiations.

The value of a traditional pension is accrued throughout the employee's time working for an employer, "so the longer you work, the bigger your payoff is going to be," Parks says. The value of a pension also takes the employee's pay into consideration as well as the expected growth rate of the company.

Once an employee works at a company long enough, they become vested in their pension, which means they are guaranteed the money in their pension regardless of their position at the company — even if they get fired or move companies. Vesting is a gradual process, so if you work a few years at a company, you can become partially vested in a pension.

Some employees may not be aware that they became partially vested in their pension at a company. If you worked at a company with a pension for a few years, it may be worth your time when you retire to call back and ask if you have any money from a pension, you were vested in.

Pensions are usually either unfunded or funded: which indicates how a company is planning to pay for the pension. Money from a funded pension comes out of a pool of invested money that the employer sets aside specifically for pensions. Meanwhile, unfunded pensions are paid out directly from the company.

Here's the main difference between pensions and 401(k)s: a 401(k) is a defined-contribution plan where both employer and employee can contribute to the account and invest funds to save for retirement. A pension is a defined-benefit plan that's sponsored by the employer that offers benefits based on salary and employment history at the company. So essentially pensions are plans where the employers are set up with higher costs and investment risks.