Freezing Pensions, Moving to 401K

More and more companies are doing what Goodyear recently announced that they would do, freeze pensions and move towards 401k’s as the standard retirement vehicle for most workers. Pensions, in general, are very expensive, as you may have surmised by the numbers Goodyear has put out for how much they would save, and employers are moving away from them in droves lately. How much is Goodyear going to save?

The changes will be phased in over a two-year period, and Goodyear indicated that it expects to reap savings of $80 million to $90 million in 2007; $100 million to $110 million in 2008; and $80 million to $90 million in 2009 and beyond.

Honestly, I think this is better for most workers because pensions depend on the solvency of the company that offers them. Sure, the company is supposed to fund the pension so that even if they go bankrupt, the pensions would survive – but as recent airline bankruptcies have shown us, this isn’t a certainty. The Pension Benefit Guaranty Corporation (PBGC) paid out pennies on the dollar when some airlines went under! So by moving away from pensions, employees are better off from a responsibility perspective because they don’t believe that the freebie will be there in the future. Obviously, by removing pensions all together, it’s a losing proposition for employees but at least there’s a philosophical silver lining.

Ultimately, it’s is better to not be reliant on something like a pension because it can certainly vanish into thin air (or be converted into pennies) even though employees are losing in the long run.