Definition of a Defined Benefit Pension Plan
A defined pension benefit plan is a pension plan where an employer agrees to pay an employee a set amount each month based on the earnings history of the employee. If an employee has high earnings in the period near retiring, it could boost the amount paid during the employee's retirement years. This income can help supplement income for those collecting Social Security, or it can be the financial cushion for an employee who chooses to retire before age 62, the minimum age a worker can collect partial Social Security benefits in the United States.
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History
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Defined pension benefit plans were negotiated during the labor movement in the 1900s. Labor union officials worked with manufacturers and other blue collar businesses to create a system that would care for aging workers and give them a financial reward for their hard work. During this time many employees were overworked and underpaid. As the workers became elderly and could no longer work, it was difficult for them to financially handle medical bills and expenses. Some of the medical expenses were directly related to the work the retirees performed while working for the company.
Function
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Among the labor unions instrumental in creating the defined pension benefit plan were the United Automobile Workers (UAW) and the International Brotherhood of Teamsters (Teamsters). In the automotive and manufacturing careers, the need for pensions was great. As a result of many contract negotiations and even some labor strikes, defined pension benefit plans serve as an aid to retired workers who face a dramatic decrease in income after leaving the workplace. In manufacturing, the last five years of a retiree's employment is crucial in determining how much money will be calculated into the pension plan. Most retirees from these careers can receive up to $5,000 per month due to the hours they worked and the salary they earned near retirement. The money from these plans typically arrive in the mail or via direct deposit at the beginning of the month. Retirees in a defined pension benefit plan receive a cost of living raise every five years as a part of the labor agreements between the employers and the union.
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Benefits
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In additional to receiving cash benefits from the employers for the rest of their life, retirees in a defined pension benefit plan can also receive medical insurance as a part of the package. The medical insurance usually has some restrictions, but it allows the retiree to continue to visit the doctor and pay for hospitalization and medication. In recent years, some companies have cut costs and required retirees to order prescription drugs by mail. Costs to retirees in a defined pension benefit plan have risen over the past few years due to the economy and elderly people living longer.
Misconceptions
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Some people believe that retirees don't need a cost of living raise after they reach a certain age. In the case of one retiree who worked and earned $100,000 per year and receives a pension of $3,000 per month, that retiree is only receiving 30 percent of the former work salary. This reduction in income can greatly effect the lifestyle of the retiree and create income problems. All retiree medical plans do not pay for all medications. This means that the retiree must use a portion of the pension to pay for medication, copay at doctor's visits and any other accommodation needed that occurs with aging.
Theories/Speculation
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The problems in the U.S. economy has made many retirees anxious about the future of their retirement plans. Employers have made concessions to what if offers retirees. Some companies have offered higher buyouts (a lump sum paid at retirement) in exchange for dropping medical coverage to save the company money. In some companies retirees lose their medical insurance at age 65 when they qualify for medicare provided by the United States government.
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References
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