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How does the pension system in USA work? Do the companies pay you a small salary after you retire? It reads like that. In that case, what about the place you worked until you were 40, are they still on the hook? What if the company closes down?



Most pension systems have been phased out. The ones that remain are grandfathered in favor of 401ks for new workers. If existing corporate pension systems default, the US government guarantees (through the Pension Guarantee Corp) the pension at a reduced rate.


It varies. A lot of places have moved away from pensions towards contributions to tax advantaged retirement accounts.

In the case of pensions, they will vest over time and people would receive benefits matching their vesting level. If a company shuts down, the pensioners are creditors of the company and there is some kind of bailout system (I guess basically a federally run reinsurance program).


Wait, their pensions depend on the health of all the companies they once worked for, rather than some independent insurance company? That sounds like a really unreliable way of handling things.


To a large extent, yes. Companies are required to pay for insurance on the pension, which is run by the federal government's Pension Benefit Guaranty Corporation [1], so it's not 100% dependent on the long-term health of the company. But the insurance doesn't necessarily cover the full pension, especially if it was a fairly generous one (there's an absolute cap of $60k/yr, and various other caps relating to years of work). In practice it does mean that how people fare in retirement depends in part on how lucky they were picking an company. If you're a retired electrical engineer who worked for IBM or AT&T, your pension is still fine. If you did the same job for U.S. Steel, less so.

[1] https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...


That was the dream a long time ago, mainly in the 1950s-1970s. You'd work hard in school and hope for a good job at a good company like IBM or Ford, then you'd be the best company man possible to cling to that job and rise as high in the ranks as possible, then retire with a substantial % of your salary paid out in pension and generous benefits until you died.

It was real, but mostly only for the high born, the nepotistic, people in the "correct" church, and the backstabby. And of course white males only, hahah that almost goes without saying. It wasn't quite as amazing as people thought, but those who benefited sure did enjoy it.


Very few companies offer pensions now - mostly the government.


Aren't they normally differentiated as Defined Benefit pensions vs Defined Contribution pensions.


In the literature/law yes. In every day use in the US a pension means a defined benefit plan sponosered by your employer.


> Very few companies offer pensions now

All professional jobs offer pensions, I'm sure. Including all the major tech companies.


Haha, nope.

You have the "opportunity" to contribute to a 401k, and if you use the company's (poorly run) 401k option, they may decide to match up to a percentage of your contribution.

For instance, I contribute 10% of my paycheck towards the 401k, my employer matches 4% of that. That's it. And I work in IT for a Fortune 500 company.


But a 401k /is/ a pension.

> In the United States, a 401(k) plan is [a] tax-qualified, defined-contribution pension account

https://en.wikipedia.org/wiki/401(k)


A 401(k) (defined contribution) is not the common parlance "pension" (which would be defined benefit).


So why does Wikipedia use the 'pension' terminology?


Wikipedia has more than just an American audience. "Pension" in many other countries means any form of retirement plan; that's the definition that the Wikipedia article on pensions describes. In colloquial usage in the U.S, it explicitly means defined-benefit plans to distinguish them from 401(k)s and other retirement savings accounts, which are defined-contribution.


Well it's more confusing that helpful then! Because as a foreigner when I look up what a 401(k) is and it tells me it's a pension, and then everyone tells me it's not a pension, I don't know what's going on!


This is one of those things where details matter, and that's why terminology is different. It's like if I went to England and someone told me "Parliament is like Congress" and so I go around thinking "Oh, you have two houses just like us, and you have political parties and elected representatives, must be just the same", blissfully ignorant that the way parliament operates is very different from how the U.S. Congress operates, and the different mechanics lead to very different emergent effects (I had no idea what this coalition government thing in the last election meant, for example; such a concept doesn't exist in the U.S.).

Whether you have a pension or a 401(k) has a very big impact in how you organize your career in the U.S. If you have a pension, you're strongly incentivized to stay with one employer for a lifetime, because you lose it if you leave and your benefit usually depends upon length of service. That in turn means that you don't care how your resume looks to the outside world, you don't invest as much time in professional development, and you generally accept whatever advancement schedule is available in the organization.

If you have a 401(k), you're strongly incentivized to maximize your earning potential, because you only get out of it what you put into it (plus investment returns). That usually means switching jobs, which means you need to consider how your professional experiences will look to the outside world. It means that you need to be constantly up-to-date with how the industry is changing around you, and with how the financial markets are doing, and manage your own finances & career development. On the plus side, you take your 401(k) with you if you quit or move, and so you have greater flexibility. And you're not exposed to the risk that your employer could just die and take your pension with it. You are exposed to the risk of the stock market crashing, though.

Because life strategies are so different based on the different retirement schemes, people will assume certain things about you if you say you have a pension, and they'll assume other things if you talk about your 401(k). If you say you have a pension when it's really a 401(k), those assumptions are likely wrong, which leads to awkwardness all around. That's why they're different terms in colloquial usage.


> because you lose it if you leave

Typically no, unless you're unvested, I think. You may get a much smaller benefit, though.


Ouch. I haven't worked at a place that contributed less than 6%; my current employer also adds a flat 5% to a separate pension so people don't get bit by the maximum tax free limit (as opposed to simply matching more than 6%)


Matching isn't affected by the tax deductible contribution limit. There is a separate and much higher limit for employer contributions (~$35k/year).


Just to make sure I am correct, your 401k gets matched with 0.004 of your total pay? Thanks


No. The way it usually works is you can contribute up to X% of your pay tax advantaged (with a hard dollar cap) to your 401k. The company can match up to Y% pay.

What he is suggesting is that he can contribute 10%. Everything he contributes up to 4% is matched by his company (ie a 4% pay increase). Usually its a little more complicated than that. Like they'll match 1:1 the first 2% and then 1:2 the next 2% for a total of 3% matching funds.


What are typical matches?

In Norway there are no matches. The company just have to pay 2-7% of your salary to your fund each year. For tech jobs it's mostly at the top of the range.


Its fairly variant. As far as I can tell (and I'm no expert) the max is either non-existent or so high that i've never encountered it in the wild. Between 2-5% seems common in my experience.

The companies do not have to do this. It is purely optional, though there is a tax advantage I believe. Most "professionals" have the option at their company.

A bigger problem is that the 401k offerings are fairly bad usually. The people picking them are HR staffers who frequently don't have experience in finance, so the plans frequently have murderously high expense ratios. Even to the point where some companies repackage Vanguard funds that you can get on the open market for 10x less.


There is a maximum total contribution.

https://www.irs.gov/retirement-plans/401k-plans-deferrals-an...

total employee and employer contributions (including forfeitures) - the lesser of 100% of an employee’s compensation or $54,000 for 2017 ($53,000 for 2015 and 2016 not including "catch-up" elective deferrals of $6,000 in 2015 - 2017 for employees age 50 or older) (IRC section 415(c))

So the max is basically 200% match of the individual's contribution, which is maxed out at $18,000 for an individual under 50.


That varies by employer. For professional salaried jobs usually 3-6% from my experience.

Many companies are doing odd things now with half percentage matching. So they will say they match all of the first 4% and then the half of the next 2%.


It varies widely. I have had nominal 3-6% matching, but it was capped at an absolute dollar amount. That amount made the effective match more like 1.8-3.8%.


Likely 4% of his paycheck or 0.0385 of total pay after matching.


I've never even heard of anyone getting a pension, out of all my friends in tech & myself. They're basically extinct at this point.


Well I work for Oracle and I get a piece of paper every year telling me how much money is in my 'Personal Pension Scheme'.


Are you sure that's a pension plan and not their internal branding for a retirement savings account? Pensions are totally unheard-of among tech companies, I don't know a single person who has one. There are 401(k)s, and the good companies will match contributions generously, but no pensions.


A 401k is just another type of pension though. When you say 'pension' you really mean 'defined benefits plan'. But that's not what pension means. A pension is any kind of savings or investments for retirement, with certain tax benefits.


Maybe that's the dictionary definition, but in common parlance, everybody uses "pension" in the sense of distinguishing it from a 401(k) or other tax-advantaged savings/investment account.


Retirement plans, yes. Pension plans, no.


But a retirement plan is a pension. Maybe it's a British English / American English thing, but to me a pension is any savings or investment you keep for retirement.


Its a difference between "general" use and "technical" use. Usually when us normal people in the States talk about a pension we mean a defined benefit retirement plan sponsored by your employer.

But in the legal/literature use it means any savings you keep for retirement. The defined benefit plan is basically gone from the private sector in the USA and is only existent in the public sector.


Most people seem to refer to pension in the U.S. as a private company's social security set-up - you get a set amount per month for the rest of your life after a term of working at the company.


Pensions in the popular sense are more properly named "defined benefits plan" in financial jargonese.


in the US a "pension" is a mostly guaranteed (and insured) payment for the rest of your life.

A 401k is a fixed amount of money that you contribute, sometimes with your employer "matching" and it is usually invested in the stock market or in company stocks. It can run out quite easily.


Whut? They offer a 3% 401k match. Very different from a pension.


Wikipedia says 401ks are pensions.

> In the United States, a 401(k) plan is [a] tax-qualified, defined-contribution pension account


Defined contribution is the key part.

In the US at least, if you say a job has a pension... it has a pension in the sense that you work X years, you get paid $y per year for life after you retire. Chicago teachers and Fire Fighters have a pension (for now). Tech employees almost never do.

No one would EVER advertise a job as having a pension if it had a 401k. It would be advertised as "401k match OR retirement benefits OR something along those lines"


Not even close.

Facebook didn't even have a 401(k) last time I interviewed there. This was after they went public.


The pension system in the US has gone down the ratholes. About the only people now entering the workforce that can get them any more are government (mainly municipal) employees and railroad workers.

The larger employers have moved from employer-managed defined-benefit pension plans to employee-managed defined-contribution pension plans, usually named for the section of tax code that describes the characteristics of the plan.

With defined-contribution plans, while you are working, your employer has the option of paying some money into your retirement account, which has various discouragements against early withdrawals. When you stop working, they stop paying. But you still control the account. With pension plans, the company sets money aside for future pension obligations, and may occasionally get audited by a regulator to ensure that the money is still there and adequate to pay out future benefits under certain assumptions that might not necessarily be true.

But the promised benefits of each pension plan are different, selected by the company (or muni-corp) that offered them. There was always a perpetuity (until death), and there might have also been benefits for surviving widow(er)s and minor children. Various health care benefits might have been attached, but probably not, as most retirees would probably go to Medicare.

The employee-managed accounts are seen as preferable to the older pension system, because some companies chose to use the employee pension fund to leverage their other investments or embezzle outright, and thus reneged upon their promises to retirees, who were forced to fall back on government-run pension insurance and Social Security.

Even now, the pension funds for municipal employees are at risk in towns that overpromised benefits to attract their employees, and are now going bankrupt because of it. What do you do if you are forced to either take a permanent haircut on your pension payments, or live somewhere that cannot afford to hire a firefighter? In short, I think it very likely that every remaining pension plan in the US is based on accounting that simply does not compute. At some point in your career, you discover that someone was lying to you and cheating you, and by then it's usually too late.

With the 401(k) plans, at least you know you're getting screwed out of your retirement as you're still working.


Defined benefit plans are often required to invest in investments with a terrible return.




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