Social Security and Pension Plans

Certified Financial Planner (CPF) Alan Leitson talks about the history of Social Security and Pension Plans.

On Social Security

"Alan Leitson, certified financial planner, helping you by putting the odds in your favor.

Social Security is a program that was developed originally for people to receive some sort of payout when they stop working. And when our great grandparents and grandparents and some of these folks initially started with the program - this sounds sort of ghoulish - but when they started in the program, generally speaking, work was tough, it was a lot more physical and the benefits for Social Security typically started at age 65.

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Life expectancies were not going to go much beyond that. Now, I don't want to say you work, you work, you work and then one day you die and hopefully you've gained some benefit. But in theory, average life expectancies might have been in the range of 75 years old when the programs were first running. So, again, no problem. In a 10 year payout you'd receive the benefits of getting a check when you weren’t working. And in theory you contributed to make all this work during the working years that you did.

Now, Social Security has gotten a lot more complicated in the subsequent years. There are a lot of benefits and programs that have been built on to Social Security. One very, very important program is Medicare. And Medicare is part of your paycheck too. If you ever look at it, there is a section that goes out for Medicare. And what it is for is healthcare after you're 65. In addition to the government realizing that they needed a program that had some income coming in to people once they stopped working, there was also the feeling in roughly 1964-1965, in the mid 1960s, they came up with the idea that in addition to Social Security, they needed this healthcare coverage. That is a quick definition of Medicare. So there is a program in pace for where you receive healthcare that's covered, not just sending you, per se, a check, but when you go to a doctor after you're 65, in a sense, it's a government provided program. So that's Social Security and Medicare in a very, very short picture."

Understanding Pension Plans

"Alan Leitson, certified financial planner, helping you by putting the odds in your favor. You know, today I'm talking about pensions. Pensions are an amazing thing. They were come up with the same concept as Social Security way back when in the industrial era, back in the 1930s and 1940s, it was recognized that if people stopped working they still needed to receive some sort of income. So pensions were developed as a way for the average person. Companies would, if you worked for the employer, they would put money aside each year, and it would be set up in your account, one specifically designated for you. And it would be there and it would grow over time and it would pay you a certain amount.

The great thing about pensions, in addition to the fact that they just pay you money when you are not working and retired, is that most of them were called traditional pension plans, and basically all the risk was on the plan. It's not like investing in the stock market or doing other things. It was going to pay you a set amount when you retired; no risk. And this was what you were going to get paid.

Well, in fact, they worked exactly like they were supposed to. Many people in large corporations through the many 50 years looking back, and through public sectors such as school teachers and public employees, they get pensions; a set amount every month when they've stopped working.

Well, the problem is that - I say problem because somewhere in the realm of 40% of the people in America receive some type of pension benefit. They get a check every month while they're not working, relatively no risk in that process, and it's great they have these well protected benefits."

What's the problem? Well, it's back to the bucket example. The pensions that were projected, even though you have a specific account for you, if they didn't put in enough money to pay that and it ran short, that could be one issue. Now in most cases pensions were properly funded and they will pay out. But somewhere along the way in the 1990s and in the 2000s pensions became very expensive because of funding and other issues. And private companies quietly, and for various reasons, maybe good business reasons, discontinued them.

What does that mean to you? Well, if they discontinued them, you may not have that out there, you are not going to have the benefit that, say, 40% of people have today who are retired. So when you get to be 60 or 65 and you want to retire, if you don't have this predictable income stream coming to you, what does that mean for you today? It means that you need to save more and more diligently, because if you can't count on that item that was a benefit to your grandparents and parents, then you're going to have to basically create your own pension.