What Is a Noncontributory Pension?

American citizens can save for retirement through a variety of means, from personal retirement accounts to employer-provided pensions. Employer-provided pensions provide continued payment in retirement to former employees. Two primary types of employer-provided pension plans exist: contributory and noncontributory. Understanding the full extent of noncontributory plans requires looking not just at their role in the American workforce, but also at their impact on retirement schemes throughout the world.

Basics

Basically, a noncontributory pension is exactly what it sounds like -- a pension plan to which an employee make doesn't make any contributions. Rather, the employer makes all contributions to the plan. Such plans constitute a form of employee benefit, sometimes called a fringe benefit, and differ significantly from contributory plans, to which you and your employer both contribute. Though commonly associated with government work such as civil and military service, noncontributory pension plans also exist in the private sector.

Calculating Pension Benefits

The amount of money employers contribute to a noncontributory pension plan depends upon the amount of work you do. Airplane manufacturer Boeing, for instance, provides employees with a noncontributory pension plan that pays a predetermined monthly amount into a pension account. The company bases the amount of a monthly payment on years of service. The University of Pittsburgh bases contribution amounts on a employee’s salary, expected age of retirement and the number of years of participation in the program.

The Specifics

A noncontributory pension plan does not constitute a set thing in the way that a 401k or IRA does. Rather, the specifics of these plans may change drastically depending upon the stipulations of the plan in question. Boeing, for instance, publishes a 29-page pamphlet containing all the specifics on its noncontributory plan. As per this information, only employees belonging to a union that accepts all the provisions of the plan can receive the plan. Other employers may offer noncontributory plans unconditionally.

Throughout the World

Noncontributory pension plans play major roles in a number of countries throughout the world. In the Republic of Ireland, for example, the government provides state pensions to residents. Two types of state pensions exist, contributory and noncontributory. Which you receive depends upon your work history and other considerations.

According to the International Labor Office's “World Labor Report 2000,” governments in developing nations sometimes use state noncontributory pensions to gain popularity and thereby remain in power. However, setting up noncontributory pensions in countries with unstable infrastructure and economic systems can cause financial problems by resulting in greater expenditure than influx of funds.

References

• Business Dictionary: Noncontributory Pension Plan
• Massachusetts Department of Revenue: Pensions – Government
• University of Pittsburgh Office of the Provost: Retirement Program
• Boeing: Noncontributory Retirement Plan
• “World Labor Report 2000”; International Labor Office; 2000
• Republic of Ireland Citizens Information: State Pension (Noncontributory)