Cat Food

In his personal finance class, NC State lecturer, John Huggard passes out news clippings with stories of old people crowded into small apartments surviving on cat food. He intended to show the importance of saving for retirement. If you do not save, your future may include cans of IAMS.

Last week President Bush signed into law changes to the corporate pension system, an act that many analysts believe affirms the slow death of traditional pension plan. Congress passed this law as Delta’s pilots lost their pension plans and IBM won the legal change to the forceful buyout all its employees' plans.

Pension plans give guaranteed benefits to workers and remove the worker from financial decisions. The workers never have to contribute to the program and professionals handle the investment. Show up for work and you get paid for life. The system works until corporations renege on the guarantee by going bankrupt. There again, corporations can go bankrupt trying to keep up these guarantees. GM pays $1500 per vehicle it sells to its pension’s healthcare benefit. Pensions force the risk of inflation and long life (yes, long life is a risk) onto the corporations. 401Ks on the other hand push these risks onto worker.

401K plans also its plusses and minuses. On the upside, 401Ks give workers ownership and all the benefits ownership gives. On the other hand, myopia hurts 401K plans the most as people have a tendency to cash out their 401K when the leave a job. Another downside, people do not know how to properly invest their money. Finally, for low-income employees who just make it now, where are they going to find the money to contribute to a 401k?

Nobody should loss his or her pensions and the government should do all it can to prevent it from happenning. I think 401Ks are a better path than pensions, but the government needs better inducements for people to contribute and keep their money in their retirement accounts. Until then, I suggest you buy shares in PETCO.