What Happened to My Pension and Health Benefits?

October 2007

On a trip to the airport recently, a taxi cab driver told me a sad story. He had worked for a major corporation and felt he had been tricked out of his retirement benefits—both his pension and his health benefits. He was in poor health (he was unable to lift my luggage into the trunk), but still had to work to support himself and his wife.

He lamented that his father retired with a good pension and enjoyed his old age. He felt unfairly treated and did not understand why the corporation couldn’t make good on its promises.

I don’t know the legal ramifications of his plight, but I do understand the accounting implications. Because of fairly recent changes in the accounting standards, we can all expect to fund our own retirement either by saving in advance or by driving a taxi-cab when we are 70 years old.

The two main standard-setting bodies have been busy regarding pensions and health benefits

In the private sector:

First it was the FASB—the Financial Accounting Standards Board who started shaking things up. The FASB sets standards for what corporate financial statements will look like and what disclosures a corporation must make to the public and shareholders.

The FASB decided that the way that corporations were accounting for pension plans and health benefits was inaccurate and misleading.

For instance, many corporations promised their employees’ health benefits after retirement, but were not socking away enough current profits to pay these benefits. In essence, they were hoping that future profits would be able to pay future health benefits.

But as we have all experienced, health costs are increasing year after year. Both the cost of insurance and medical care is increasing and no one expects a slow down! And we are also living longer. In order to fulfill their promises, the corporations would have to be socking away serious amounts of cash every quarter.

The FASB now requires that corporations disclose how much they should have socked away versus how much they have socked away. This gap is called the “unfunded liability” and must be recognized on the financial statements.

For some corporations, this gap between what they promised and what they had saved up was so huge that it scared them into renegotiating existing promises and prompted them to stop offering post-retirement health benefits to new hires.

The same thing happened with pension benefits. Corporations were promising more than they could actually pay and the FASB asked them to recognize this fact in their financial statements. So, pension benefits are quickly becoming a thing of the past.

Now you know why most companies are offering their employees 401Ks. The corporation can fund the 401K at a rate that is comfortable for them (if they decide to fund—or match—your 401K at all!) and the 401K is the employee’s long-term responsibility—not the corporation’s. 401Ks are sold as being “portable”, which means you can take them with you from job to job with no one employer having control over your retirement benefits.

In the public sector:

The other standard setting body—the GASB (Governmental Accounting Standards Board) —also just issued a flurry of new standards that makes governments own up to their promises. And because of this, many governments are altering their promised obligations to government employees.

Good retirement benefits were always one of the beautiful things about working for the government, and now the benefits are often less than beautiful.

For instance, the State of Alaska recently switched its retirement plan from a “defined benefit plan” to a “defined contribution plan”. That means that employees are not promised a monthly stipend every month of retirement—that would be a defined benefit—but are only promised that the State of Alaska will contribute to their retirement fund every month. This arrangement is much less comforting to employees and State of Alaska employees fought it tooth-and-nail the whole way through the legislative process to no avail.

So what are you going to do about it?

Well, don’t count on anyone else to take care of your retirement… bottom line. You need to save for it yourself because your employer is not going to take care of it for you.

Also, know that Social Security benefits are small and may not even be around when you are ready to retire. The federal government doesn’t even pretend that they are socking money away in a savings account for future retirees. Current Social Security benefits are being paid by current employees. That is why economists are predicting the collapse of Social Security; when the baby boomers retire, there won’t be enough employed young people paying into the system to support them.

And lastly, consider the concept of single-payer health insurance. Under single-payer health insurance, all employees and employers would contribute to a federal fund that would take care of our health benefits. If you haven’t had a chance yet, check out the movie Sicko, which is now out on DVD. Our health care system is definitely broken and this movie will start you thinking about what can be done about it.