Posted on 08/20/2006 2:12:26 PM PDT by Graybeard58
The pension bill that President Bush signed into law Thursday represents the most sweeping changes to the country's pension laws in more than 30 years.
What does it mean to you? Basically, it's another step toward putting more responsibility on you to save for your retirement, rather than government and corporations taking care of you in your old age.
Here are the key take-aways:
If you're a low- or middle-income earner, it's good to know that the savers credit is being made permanent. It had been set to expire at the end of this year. It gives qualifying taxpayers a credit -- free money -- for contributions to retirement savings plans.
If you're not participating in your employer's 401(k) plan, or are about to get a new job, don't be surprised if your company automatically enrolls you. That provision of the law is intended to encourage people to save.
If your company offers a pension, expect the terms to change. That could mean your company freezing your plan, thanks to the legislation's tougher funding requirements. Or your pension could be converted to what's known as a cash-balance plan, which has different implications for your retirement.
If you're a retiree receiving a pension, you shouldn't worry. Companies can't cut or revoke pension benefits already earned.
But as always, if a company goes into bankruptcy, it can turn the liabilities over to the government, potentially resulting in reduced payments. And, some critics say, the legislation encourages companies to do just that.
The legislation overhauls funding rules for pension plans that have allowed companies to claim their pensions are financially sound even when they have staggering liabilities.
The intention is to improve the health of corporate pensions, which have suffered low investment returns, thanks to the bursting of the stock-market bubble and low interest rates.
However, experts say that the bill also will speed the disappearance of traditional pension plans because companies will find them much more expensive to keep up.
"It's going to probably dampen what remaining employer support there is for defined-benefit plans," said Norman Stein, a law professor at the University of Alabama and an expert in pension law.
Those that keep defined-benefit plans are expected to move toward cash-balance plans. The pension legislation created a legal framework to convert traditional pensions into cash-balance plans.
"The floodgates are open," said Janet Krueger, spokeswoman for a group of current and former employees who challenged IBM's cash-balance plan. "Other people are going to be converting."
In a traditional pension plan, workers' pensions are determined by a formula in which years of service are multiplied by average pay in the worker's last few years of employment, and then by a percentage, typically 1 percent to 2 percent.
In such an arrangement, workers earn benefits slowly at first, but the curve gets steeper as tenure grows longer. So those who work many years at a company can earn substantial pensions, while those who work fewer years earn disproportionately less.
In a cash-balance plan, the employer sets up a hypothetical account for each worker and credits a percentage of pay to it every year.
Under that formula, benefits accrue in a more linear pattern, so short-tenured workers end up with a better pension than they would under a traditional pension plan.
Cash-balance plans tend to favor younger employees because they have more time for their money to compound.
One of the attractions of cash-balance plans is that workers can take what they have in their accounts when they leave their jobs. That makes the plans ideal for younger workers, who tend to be more mobile during their careers.
The IBM employees group, which alleged that the plan discriminated against older workers, said it plans to ask the court to reconsider the ruling.
The pension bill contains many features that are clearly good for workers.
The legislation encourages companies to automatically enroll workers in 401(k) plans. Workers will have to opt out of the plan instead of opting in, as they do now.
Retirement experts say automatic enrollment is the best way to get more employees to save.
"That's a good thing," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "It will make it easier to have automatic enrollment, and it will lead to further participation" in 401(k) plans.
And, for the most part, the MSM ignored this important legislation to praise Hezbolla.
--I too was astounded at the lack of attention to this---
"don't be surprised if your company automatically enrolls you"
How is this putting "workers in control?"
The markets need more ca$h infusion now, not later. The aging of the baby boomers will tank the financial markets in 10 years for another 30 and Social Security will be broke by 2047 anyways.
Corporate America as well as the States have been underfunding their Pension Plans for years. The solution seems to end Defined Benefit Pension Plans altogether. Companies can declare bankruptcy to absolve themselves of their responsibility as we saw with United Airlines. Looks like this will hit GM and Ford within 2 years.
so be it.....
however, this will usher in the new two tier system, with the favored govt workers of every stripe receiving huge payouts that are guarenteed......
it must mean that their work is more "important" than the rest of us.......
I am irk by proposals that the government should force people to save. Where are the civil libertarians when I need them?
ping
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