Pension Reform: An Introduction

June 5, 2012 | 7:44 AM

By Emily Corwin

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Last week the House and Senate failed to agree even to create a commission to make recommendations regarding pension reform. As I set out to write this piece, I found the different plans and their costs and benefits pretty confusing. Before I could get myth-busting, I needed to learn the basics. I thought I’d lay them out here, with a few personal anecdotes.

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For much of his adult life, my Grandpa Tom — who would be 95 were he alive today — worked as an glass engineer for Fletcher Terry, a glass cutter manufacturing company still in operation in central Connecticut. Part of his employment benefits included a pension, which he and my grandmother lived on after he retired. His pension was of the “defined benefit plan” sort, which means that a part of his wages were invested, along with all of Fletcher Terry’s other employees’ wages, in a fund that would pay a guaranteed pension upon retirement. My mother doesn’t remember her father or mother ever worrying about their retirement income. As far as they were concerned, the money was already in the bank.

Today, few people working in the private sector can imagine that kind of stability. Along with Fletcher Terry, most employers have switched to the “defined contribution plan” sort of retirement plan, which requires employees to put a part of their salary into an individual 401(k), then matches a certain amount of that contribution. This kind of plan can be good for savvy investors, who can reap the returns from savvy investments — but a misinformed investor or bad market could leave a retiree with little or nothing.

These days, the people who enjoy the stability of defined benefit plans are state and municipal employees. But that is changing, too. The 50 states collectively have between $700 billion and $1 trillion in unfunded pension liabilities. New Hampshire’s share of that is $4.2 billion. Everybody seems to agree that something has to change. But for now in New Hampshire, nothing is changing at all. Last week the House and Senate failed to agree even to create a commission to make recommendations regarding pension reform.

Why can’t legislators agree? And which is really better, old-fashioned pension funds, or newfangled 401(k)s? Read on!