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General Electric, one of the few big businesses that still pays out private pensions, said it will freeze pension plans for 20k US employees and offer pension buyouts to another 100k former employees.
Pensions are a pricey problem for GE: Its pension programs face a roughly $22B deficit. Icing these pensions will reduce that deficit by $8B, the company says.
Private pensions used to be HOT
American Express became the first US company to offer a private pension in 1875. By 1930, many of the country’s largest companies — Standard Oil, AT&T, Goodyear, GE — offered pension programs to their ’ployees.
Pensions — AKA “defined benefit” plans — became popular among both employers (who didn’t pay federal corporate income tax on them) and employees (who liked getting predictable retirement checks).
In 1975, 88% of private-sector employees with retirement plans had pensions — they were the rocks upon which Americans built their Jimmy Buffett-inspired retirement dreams.
But then prevalence of pensions plummeted: By 2005, just 33% of private-sector employees with retirement plans had pensions.
So, where-oh-where did all the pensions go?
To put it bluntly: They were 401(k)illed.
Pension-pocalypse came about largely by accident: In 1978, Congress added a new provision to the tax code — subsection 401(k) — that allowed wealthy executives a tax-free option to defer compensation.
The change was aimed at the 1% — and NOT meant to replace pensions — but the cost-saving benefits inadvertently inspired the Great Pension Pivot: In 5 years, nearly ½ of big biz was offering 401(k) programs — which were cheaper than pension programs.
Then, pension programs started FREEZING
In our new, 401(k)razy world, employees — not their employers, as before — are at risk when the markets take a turn for the worse.
This leaves pension-payers like GE with huge costs: GE’s pension obligations are the worst in corporate America, and last year it contributed $6B to try to reduce its deficit.
By freezing its pension program, GE will stop paying out benefits to 20k formerly pensioned employees in 2021 and force them to join its 401(k) program instead (it stopped accepting new pension participants in 2012).
GE joins a number of other big businesses that have rolled pack their pension promises in recent years: UPS, AIG, IBM, Boeing, and The Washington Post all changed pension plans since 2014.