Traditional Pensions Will Soon Disappear In The US

Traditional Pensions Will Soon Disappear In The US

Millions of people receiving monthly pension checks could be at risk of not receiving them anymore

Earlier this month, the Treasury Department issued a notice allowing employers to buy out current retirees from their pensions with a one-time lump sum payment. This decision reversed the ban on this type of practice issued in 2015 during the Obama presidency, when was noticed that lump-sum payments shortchanged seniors. AARP Legislative Counsel David Certner stated:

“Permitting plans – for their own financial benefit – to replace joint and survivor or other annuities with lump-sum payments will reduce the retirement security of both workers and their spouses.”

Traditional pensions represent a defined-benefit pension that provides a guaranteed monthly income for as long as someone lives in retirement, but in recent years, employers started to prefer the 401(k) accounts which basically represent a finite amount of money that becomes available to working people at age 59.5.

The recent regulations made by the federal government will make traditional pensions easier for employers to get rid of and thus shrinking the number of people covered by traditional pensions. Instead, they are favoring the 401(k) account from an insurance company, or they can offer their employees a lump sum up front according to a formula that approximates how much a retiree would receive if they lived an average number of years, an option much cheaper and much more comfortable for hiring companies.

However, retirees opting for the lump sum do not realize that amount is actually less than the total they would get over time if sticking to traditional pensions. This option is entirely voluntary but behavioral economists found that people tend to value money that’s right in front of them instead to analyze the benefit of receiving money in time because most people do not have advanced financial knowledge in order to fully evaluate their options and sometimes they are also pressured by family members.