Changes

A '''Pension''' is a benefit paid to people [[retired]] after their [[employment]]. 

A '''Pension''' is a benefit paid to people [[retired]] after their [[employment]].

Two major types of Pensions exist, Defined Benefit Plans, and Defined Contribution Plans.

Defined Benefit plans provide a known amount to the retiree.  The pension benefit is usually based as a percentage of the employee's last year of work or average of some 3 to 5 last years of work.  While such pensions are still common in the public sector they are rapidly disappearing from corporate America.

Pensions can be defined as either "defined benefit" or "defined contribution".

Defined Contribution plans are tax deferred savings plans whereby an employee can save money towards his or her retirement.  This saved money plus the investment income earned thereon becomes the basis of the retiree's post retirement income.  Many companies will assist employees by adding company funds to the employee's contributions.  These plans are often known by the section of the IRS code that allows them; 401(k).

In a defined benefit plan, the amount paid to the retiree after employment is known (or is easily calculated); what is unknown is the amount required to provide the benefit as it depends on interest rates (often over a long period of time).  Also they are not portable (in most cases); if an employee leaves the employer outside of retirement, the pension is greatly reduced if not completely eliminated altogether.  While defined contribution pensions are still common in the public sector (the [[Federal Employees Retirement System]], and its predecessor the Civil Service Retirement System, are the best known), they are rapidly disappearing from corporate America.

An important distinction between the two types of plans is that defined benefit plans are not portable.  Changing jobs before retirement age will always result in a greatly reduced pension.  Such restrictions do not normally apply to defined contribution plans provided the employee has vested.

In a defined contribution plan, the amount contributed to the plan is known (or is easily calculated, and may include amounts matched by the employer); what is unknown is the amount the retiree will have upon retirement as it depends on performance of the underlying investment (and it is possible that the amount could be zero, if the investment is in company stock and the company later ceases to exist).  They are also usually portable to an extent: usually individual contributions and associated earnings can be taken to another plan (but company matching amounts and associated earnings may only be portable if an employee is "vested" in them, usually requiring a certain amount of time employed).  [[Individual retirement account]]s and 401(k) plans are popular types of these plans.

[[Social Security]] Plans can supplement the Pensions of individuals, in addition to other savings that a person may have to fund retirement living.

[[Social Security]] Plans can supplement the Pensions of individuals, in addition to other savings that a person may have to fund retirement living.

[[Category:Economics]]

[[Category:Economics]]