Colloquially speaking, pensions are retirement plans that result in employees receiving a fixed amount of money from their former employers during retirement, often for life (although the technical legal definition of pensions is significantly more nuanced).
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The shift also reduced administrative costs for companies—and left millions without guaranteed retirement income. 401(k) plans were introduced in Section 401(k) of the 1978 Revenue Act, which was originally intended as a loophole for people like executives rather than the average employee.
With pension plans, a company contributes to an investment fund from which it distributes regular payments to a retired worker until their death. A 401(k) gives the worker control over contributions in a tax-advantaged account.
Instituted by the first Roman emperor, Augustus, around 13 BCE, these early iterations of pensions made it so soldiers sometimes received about a decade's worth of their pay, plus some land to live on. Augustus instituted these pensions to secure loyalty and reduce the risk of coups and unrest. This video includes more fun tidbits about the history of retirement.
Pensions are responsible for safeguarding the retirement plans of many corporate and government employees alike. Pensions differ from 401(k) plans and sometimes rely on alternative assets, like hedge funds, to insulate their portfolios of billions of dollars from volatility in financial markets. Read the case top pension advisor Cambridge Associates makes for hedge funds.
Baby Boomers, once the biggest generation, are now creating the largest wave of retirees in US history. Much of this generation is also the first to retire predominantly on the expectation that their 401(k) plans or similar tax-advantaged accounts performed well in the markets—which isn’t always the case.
Pension plans are a form of guaranteed retirement plan for long-time workers, and they were a major part of industries in the mid-20th century. With the rise of the 401(k) and similar tax-advantaged, defined-contribution accounts, these so-called defined-benefit plans have declined in use by employers. Compare US adoption of both kinds in this table.
The Employee Retirement Income Security Act of 1974 lumped both defined-contribution plans like 401(k) plans, and defined benefit plans (like what is colloquially known as a pension) under the term “pension” in order to protect workers and make retirement plan enforcement simpler. Learn more about the ERISA here.
In many US states, these pensions are set aside for teachers, firefighters, and/or other state government workers. However, many of these pensions are currently underfunded. This map provides a visual representation of how strong each US states’ public pensions are.
Those taxes kick in once someone starts taking distributions from their pension. Whether a pension is subject to state income taxes depends on the state and other factors. Learn more about how pensions are taxed in this article.
Iceland, Luxembourg, and Norway offer some of the highest annual pension payouts at over 30,000 euros. The below chart shows how European nations stack up in terms of which offer the highest annual pension payouts.
The United States is home to more than 33 million businesses, the vast majority of which are small businesses, with millions being created (and others closing shop) every year. These businesses often rely on loans, provide the goods and services that keep the economy flowing, and sometimes even grow large enough to enter public markets or provide private investment opportunities. Explore key topics central to business and finance, from the role of the Federal Reserve to how initial public offerings work, how millions of American students finance higher education, and more.