How do companies and the government afford to pay people a pension?


How do companies and the government afford to pay people a pension?

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They’re supposed to set aside an amount of money each year, typically partly paid by employer and partly paid by employee. The pension fund is invested and grows, pension payout upon retirement will grow depending on how long one pays into the pension until they hit a point where they’re fully vested in it (something like 20 or 30 years).

They set the money aside from each paycheck and invest it over time. When that person retires, they get their pension in a lump sum or monthly payouts. With a pension, the risk lies with the company, as they are responsible for the returns generated and funding it properly. With an IRA or 401k, the risk lies with the retiree, as they have to invest it properly to ensure they have enough for retirement.

From corporate profits and sometimes employee contributions, depends. An accountant can weigh in but Im pretty sure the funds for future pension obligations are carried as an asset on the ol’ balance sheet.

So, in theory, a well run company would be socking money – net of profits and cost of business and/or from employee deductions or manual contributions (depends whether the pension is 100% company paid or is some kind of employee deduction, employer match type of thing) – into some type of investment vehicle: stocks, bonds, big interest savings account, whatever. A less-well run company may not, but might bank on _future_ earnings to backfill. If a company’s pension obligations are _underfunded_** in this way, it actually counts as a liability aka a debt that has to be paid. So, in theory, if the company goes under, the pension obligation would be considered one of the debtors and hopefully would receive any payout from liquidation of the assets.

In the case of say a union pension, the funds for current withdraws are funded from present member contributions AND investment income. But the larger better run union pensions are making enough off their investments that the pension dues to current members aren’t necessary (Ontario Teachers Pension Plan looking in your direction). So you can see why some large pensions are quite concerned about say, oh Twitter stock value – a lot of union pensions have invested in that and don’t like Mr. Musk messing around with it.

**edit: as /u/CreativeGPX points out it doesn’t necessarily mean bad, or its being horribly mis-run, but it does mean that _at the moment_ the pension fund isn’d adequately funded to fulfill currently known future pension obligations. The company HAS to do something to fix that or they won’t be able to pay out.

Depends on the country. Here in Portugal you have a 35% mandatory contribution to the Social Security system which is the system responsible for paying your salary if you get sick and your pension when you retire.

Companies have tax benefits if they contribute for a private pension fund on the worker’s behalf, so some people also get an extra pension from there.

In the U.S., people think of Social Security as a pension system where money is contributed and invested and then paid out over time, but it’s mostly just a tax and spend system. There is some money invested, but mostly it’s tax money paid in this year is paid out to beneficiaries this year.

There are strict laws when you sponsor a pension plan in most regions requiring you to fund this pension in advance. Those funds become separate and are not allowed to be used by the sponsor later.

Periodically (often, but not always annually) the pension plan is required to submit a report of their assets and their expected payments and make up for any shortfalls.

This was much easier to fund when interest rates were higher than they are today. Due to this, many plans have adjusted the structure of their payments, and instead of getting a fixed guaranteed payment, you’ll find more and more plans offering a fixed contribution (e.g. matching your contributions or a percentage of your salary) and converting that into an annuity when you retire.

Government pensions are a little different. Because governments can issue debt indefinitely or print money as desired, some countries do not set aside funds in advance and just pay out of the general budget.

Canada for example, has both in place.
Canada Pension Plan is paid for with contributions from workers, their employers and investment returns on that money. (Costs are also lower than standard pensions because they are allowed to do things standard pension plans are not allowed to do).
Old Age Security is paid for out of the budget with tax revenues.

Functionally, both of these are pensions.