Pension Plans

Each person has primary responsibility for his or her own welfare, or so individualistic societies such as the United States decree. Personal thrift has played and probably always will play a major role in providing for old-age security. Government efforts, for the most part, have been directed toward providing a basic minimum benefit, as a matter of right, through various forms of social insurance. With assurance of a minimum benefit, the employee, through individual effort, supplemented by any benefits an employer may provide, can seek to raise his or her old-age income to an adequate level. Tax-favored treatment has facilitated these efforts.
Private Pension Plans
one of private industry’s most significant contributions to old age security lies in the development of private pension plans. Every established firm eventually must face the problem of superannuated workers, and at that point it must choose among three alternatives:
• discharge them without a retirement income
• leave them on the payroll
• grant them a retirement income
For business, ethical, and legal reasons, the first choice is questionable and the second obscures retirement costs in the payroll and fails to provide a fair and efficient means of rewarding employees from the payroll. Because its flexibility permits the private pension system to meet the particular needs of various industries, a well-planned retirement program of an employer for a company’s employees usually proves to be the most efficient and cost-effective way to deal with superannuated workers. In making the decision to install a retirement program, an employer naturally considers its competitive position within its industry and the value of the increased efficiency and production arising from its installation against the cost of the program. Because of favorable tax treatment for qualified plans, the cost of a retirement program to employers has been relatively low. This fact has been a significant factor in the rapid development of private pension plans in the United States. The rapid growth of private pension plans serves as evidence not only of the employer’s interest in, but also of industry’s acceptance of, the desirability of a planned retirement program. As would be expected, there is a variation in retirement programs worldwide. For most countries, employers are required by the government or it is their customary practice to provide both pension and lump-sum severance plans. In contrast to the United States, with its extensive collection of nondiscrimination requirements, other countries permit a pension plan design that favors highly paid employees. Some countries emphasize pension plans (e.g., United States) whereas others (e.g., Brazil) emphasize lump-sum severance benefits. The Department of Labor reported that there are over 700,000 defined benefit and defined contribution plans in existence covering almost 82 million participants. As of 1996, approximately 65 million individuals were participants in private pension plans with life insurance companies in the United States.