The U.S. Treasury department’s move last month to allow private companies to pay lump-sum pension payments to retirees and beneficiaries, instead of monthly payments, is good news for companies that do not want to be saddled with long-term pension obligations—particularly for private sector employers who have underfunded pension plans.
However, lump-sum pension payments may not work out well for retirees who opt for them. While a debate has ensued on the merits and risks of lump-sum pension payments for employees, there are also wider concerns about the long-term impacts on the entire economy when retirees do not have sufficient financial resources to support themselves. Those concerns are assuming a new importance because of the rapid growth of the so-called gig economy with temporary workers and freelancers who don’t enjoy employer-sponsored retirement benefits.
“Many companies have had a hard time making sure their plans remained fully funded, and probably most corporate defined-benefit plans today are not fully funded,” says Olivia S. Mitchell, executive director of the Pension Research Council at Wharton and director of the Boettner Center on Pensions and Retirement Research. Mitchell is also a professor of insurance and business economics at Wharton. “By offering both workers and retirees a lump sum, corporations could take the defined-benefit obligation off their books.”
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