Section 8.3 Pensions
Subsection 8.3.1 The Beauty of Pensions
When employers first began offering retirement incentives to employees, most offered defined-benefit plans in the form of pensions. Under a pension, employees have a portion of their pay deducted from their checks over their entire career. The employers use these deductions to invest in various markets. When an employee retires, the employer is obligated to pay a pre-determined amount to the employee until their death.
Pensions come in all sorts of flavors. Some even come with guaranteed healthcare for life. Some will continue to make payments to surviving spouses after the employee’s death. How much an employee gets usually depends on how long they worked for the employer and how much they made.
Unfortunately, pensions are expensive. And due to huge increases in life expectancies, many pensions are under-funded and cannot fully live up to the promises made. Thus, pensions are becoming increasingly rare. Massachusetts still has a state-sponsored pension system. It is completely funded by state employees (non-state employees don’t pay a penny in funding it). It is decently well-funded. Currently, the pension offers a maximum payment amount equal to 80%of the average of your five highest-paid years of salary, which is one of the highest available in the world of pensions.
One thing to keep in mind with pensions is that all payments are taxable.
The biggest downside of pensions is that there is no account that can be transferred to another employer (unless it is in the same system, such as moving from one state job to another state job). In this sense, employees can become “trapped” in a job because they do not want to give up what they’ve put into a pension.
