Employees of most companies are put under a pension scheme in order to secure their future retirement life. There are two policies most employees in America depend on: savings from their salaries and wages or a pension contribution plan. This implies having cuts from one’s normal income of a certain amount to a scheme that has its interest in the member’s retirement. In this case, United Airline’s situation has been badly managed to the extent of the company failing to keep promises.
United Airlines’ debt has risen to $23 billion, which has destabilized its operations as a going concern. Loans and amounts offered by banks have created many challenges. This debt has forced the company to file for the Pension Benefit Guarantee Corporation (PBGC). The Pension Benefit Guarantee Corporation set up in 1978 has its objective to secure employee pension funds and benefits; it guarantees security of employees pensions.
United Airlines’ move to file for PBGC did not work out per se. The employee benefits were too much for the company to handle. This forced United Airlines to file for Bankruptcy in accordance with the Bankruptcy laws, Chapter 11. Bankruptcy is basically the inability of an organization to uphold all its financial commitments such as financial obligations due to other preferential commitments. According to Elizabeth Warren, a specialist in Bankruptcy at Harvard Law School, an organization under Bankruptcy has its employees as the sacrificial lambs since the question is about for how much lower salary one is willing to work for the company. In this scenario, United Airlines cut down the employees’ amounts for pension by over 30% in order to handle the Bankruptcy claims. This was a blow to the employees as the company ought to pay up the enormous debt.
The effect of this move had a painful repercussion, as this meant that employees had to work over 10 more years to save for their pensions. It was more traumatic to the lower level employees as their benefits were completely exhausted, while the Chief Executive Officer’s pension was left intact – a perfect illustration of corporate irresponsibility and corporate injustice. This subjects workers to a situation where they have to work for them to live and cannot afford themselves to retire. This has the effect of pressure of lower-end employees as they are forced out of their original jobs due to the retiring age limits. The effect of such company moves has made retired staff to get jobs in order for them to survive. In the documentary, Mr. Oneil, a former mechanic at United Airlines, is forced to get another job in his retiring years as a truck driver, because the organization went back on its word and cut short his pension benefits. Mr. Oneil had planned out a pension of $3000 on a monthly basis before the crisis.
United Airlines had to categorize its debts by first bringing in superiority claims, that is, claims by banks in full total principle plus interest on all amounts borrowed. Chapter 11 on Bankruptcy provides banks with the right to demand everything the company owes to them. Banks take advantage of this and take everything, leaving nothing for the management and for the employees.
Introduction of 401(k) plans has been a move adopted by many companies in the United States to replace the traditional pension saving schemes, but the question is how different the 401(k) plans are. The 401(k) plans are saving plans whereby amounts deducted from employees’ payrolls are invested in programs that will increase employees’ pensions. However, the employees contribute more than 50% of the amount, as opposed to the initial plans where the employer contributed the greater amount for the employee. 401(k) plans have been advanced and have been adopted by some blue chip companies such as IBM signifying their reliability. This, however, contrasts with the view of some pension benefits consultants such as Brooks Hamilton, who is of the opinion that such 401(k) plans in the long run will result into too much dependency on pension savings for survival. Other experts are of the view that this completely distorts the meaning of retirement as people will be forced to work indefinitely to maintain their lifestyles even after 65 years of age, the retiring age.
Pension programs will require about 15-18% of employee income. This implies that only people with higher incomes are able to survive the tough times and cover the predictable expenses such as food, transportation, housing expenses, and other necessary basics.
New York Times
In my opinion, employees do not have to go through all the strain of working themselves to death. Through legislation, law makers can make laws that set the maximum amount of pension payable similar to a price ceiling. The percentage arrived at should be reasonably proportionate to the level of economic development, say in accordance to the level of economic conditions most people are living in. Balances in pension should be subsidized by the government. After all, according to the ideals of capitalism, assistance should be provided when the citizens are in financial crises, thus the justification.
Alternatives include using state pension funds to cover for retirement funds for companies and introducing a cash-balance pension, which incorporates the features of the traditional pension scheme and the 401(k) system. Employees would be, thus, able to watch their account balances grow while these benefits are secured by assets. This would result into reduced rates of increase in pension during recessions; therefore, enabling organizations not to avoid pension benefits pay. Criticism under this proposal arises because the role of payable pension would fall under state pension, which is now under intense pressure. However, the financial obligation would be borne by the state. Other criticism would be that the state pension has had its share of problems and adding more responsibilities to it would be unreasonable. Related ideas would be to split money for companies and money for cities in managing the pensions so as to ensure the company employees’ pension funds are well taken care of, ensuring a stable cash balance design. This would ensure government promising something it can deliver. Criticism of this cash balance design includes class action lawsuits and unionization drives amongst others. However, this has been already done before; therefore, it is not a major hitch.
Legal uncertainties under traditional pension made companies shy away, thus adopting the 401(k) plans. These are the plans where one manages an individual account through investments made; it mostly relates to the private sector. The cash balance model also accords tremendous support to workers in the private sector who had no retirement benefits at work.
There has been recent approval of retirement benefits cuts so as to avoid tax increases and layoffs of teachers and firefighters and so as to have reduced retirement costs to the state. The state is projected to save $80 billion for the next 30 years if such a move proves effective. Pension rates for high income earners would also be raised to arrive at this figure. Despite the advantages brought forth, this move will defeat labor unions that advocate for pension and it would result into future public employees to be without pension. This clearly shows an obvious drawback of such a move.
Recent steps by the state have been aimed at curtailing retirement benefits. The New York state legislature has limited pensions for future public employees only. There has also been introduction of pension schemes and 401(K) plans to the public at large. Most employees do not have saving accounts for their retirements, nor do people even save 5%-10% of their income. Most citizens are not conscious of their decisions; there are no long term plans. The introduction of such policies would come with all the problems related to the impacts of bankruptcy on pensions, as one of the examples of the setbacks.
The main objective is to choose which type of arrangement to follow, pension schemes or 401(k) plans, so as to establish the right way to follow for people to have hope for the future. Questions arising include: what are the benefits and setbacks of both systems? What are the projected costs to be saved under the better model? How exactly does the preferred method work? How beneficial are such methods to both the public and private sector?
Looking at a recent publication, almost 50% of all 401(k) plan upholders have either invested everything or have invested nothing in equity investments. Even though the overall 401(k) plan asset allocation puts forward a sensible equilibrium between cash, bonds and stocks, these findings based on individual to individual benefit raise a red flag due to the fact that most of the people in this plan have almost no diversification in their portfolios for retirement in all asset groups. Even though 401(k) plans give knowledgeable investors better latitude in modifying their retirement asset choices to their individual financial state and objectives, it seems that most of the investors lack a comprehensive understanding of the rewards and possible risks that accompany retirement investing.
What investments to choose IRA or 401(k) plan?
Furthermore, even though the study was incapable of acquiring comprehensive data on IRA accounts, a brief analysis of existing data proposes that IRA investments could be performing even worse as compared to investment of 401(k) plan. There are a number of valid explanations why IRAs could underachieve other retirement assets, the more apparent of which is that a noteworthy amount of IRA funds is held by older pensioners who have trolled over assets of their retirement plan into an IRA account. These older pensioners are inclined to possess more conventional asset allocations, as compared to younger plan members who are still employed and accruing wealth to insure they retirement.
The median rates of earnings are normally comparatively related to defined benefit and 401(k) plan members. Nonetheless, when you give the earnings of larger plans more weight than those of lesser plans, the defined benefit plans will have a significant advantage over 401(k). The excess yield is almost a full percentage point. It is, therefore, leads us to believe that one reason for the difference is that larger defined benefit plans have the ability to employ better investment administrators to yield higher returns on the assets of the plan.
It should also be noted that to the degree by which employer-backed retirement plan assets stand for merely a percentage of an individual’s total assets that are reserved for retirement, considering only the plan assets allocation could give a deceptive picture. Nevertheless, research proves that for majority of workers, their 401(k) plan balance embodies the better part of their retirement assets.
Personally, from my own analyses, pension schemes are better than 401(K) plans because of many reasons. First of all, pension schemes cover every person whether in the private sector or public, there is no discrimination due to age of the members, and people of all ages are incorporated, thus having a diversified portfolio. A diversified portfolio lowers the risk for any investment. These pension schemes are set up for long-term purposes; they are, therefore, long term investments, and they sort out financials for the future when one will not be working any more. Under pensions, a lot more is saved compared to the 401(K) plans, as no fees to investment managers and no extra costs to the taxpayer are paid. Pension plans are also affordable, thus suiting most Americans, that is, most of the population which falls in the middle income bracket. Despite the subsequent negative impacts of adopting pension schemes, they are a better option for the nation at large. A country with interests of majority of its citizens will definitely opt for something that will uplift every citizen to the minimum economic threshold.
Thus, the study emphasizes the need for workers to comprehend the advantages and disadvantages of their retirement plans in order to reap all the benefits. Even though returning to pension plans could be better for most employees, it is improbable that the present inclination toward 401(k) and other well-defined contribution plans will change. It is clear that workers must be shrewd when deciding on a worthwhile retirement strategy that will allow them to enjoy a happy and good retirement.