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From his column Minute with Don

minute-with-don-01-14-1(Editor’s note: We reprise one of Don’s columns from 2007.)

Perspective matters. Nearly everyone has had an experience when something appeared to be one thing, and upon further inspection, proved to be something else. Perhaps your memory goes back to events from childhood, late at night, when shadows on the wall appeared to be of a life-threatening nature. Maybe you’ve thought you recognized someone, only to discover it’s a person who only looks like your acquaintance. Sometimes we are embarrassed by such events, but we usually get over them pretty quickly. Unfortunately, there are more difficult situations where we have believed a person or group to be dependable, only to discover later they were unworthy of our trust.

Nearly every element of life is subject to this possibility of misidentification. As I’ve talked with people over the years about pension issues, I’ve come to recognize elements of misidentification relating to the nature of retirement plans, and it can create problems.

From a broad perspective, there appears to be a misconception about the difference between a payroll system and a pension plan. In fact, I believe some folks view pension plans as payroll plans for retirees. Their perspective is that, while they were active, income payments came from a local church employer and, once they retire, they simply go onto the “general church” payroll. They seem to assume that since most employers pay wages from current cash flow that must be the way a pension (i.e., retiree payroll) works. Unfortunately, there are significant differences.

A payroll is generally funded from current employer income. That means those on the payroll represent a current cost or liability for the employer before current net income for the enterprise can be determined. We are all familiar with employers who “downsize” a workforce to trim expenses. Sometimes, employers even try to get employees to work for lower wages or benefits. News regarding negotiations between a number of employers and employees’ unions remind us of this.

Fortunately, for retirees receiving pensions from qualified plans, those who sponsor such plans don’t have the option of “downsizing” pension obligations by cutting benefits that have already been promised, or arbitrarily trimming pension rolls. That’s why pension plans are required to carry significant reserves, much like insurance companies. Those reserves are not there to pad the bank balance. Investment earnings they generate serve as a source of income to help underwrite benefit promises. Most employers would not establish reserves for the purpose of generating income to meet payroll obligations. Their businesses usually need that money for other things, and they can always adjust payroll obligations by simply eliminating personnel.

A related misconception is that a pension is a charitable endeavor, or benevolence arrangement. Granted, there are elements of benevolence in some pension programs. When a pension plan pays benefits in such a way as to try to “make up” for low wages during a retiree’s working years, the adjustment reflects a benevolent element. Though Social Security is not a true pension plan, the Social Security formula, which pays a greater percentage of income replacement to lower paid workers than to those at the higher end of the earnings scale, reflects an element of social benevolence. We all recognize that one reason the government can do this is because it can raise taxes and print money. Those of us in the private sector have no such options.

True pension plans are legally binding payment obligations. Pension benefits are not established on the basis of how charitable the plan sponsor or administrator may feel at any given time. They are not based on an assessment of the value or worth of the recipients, or with regard to the recipients’ personal financial situations. Pension benefits are determined on the basis of affordability and long-term funding capabilities of the plan sponsor. No benefit could ever reflect the true value of a lifetime of ministry.

Personally, I am relieved that pension plans aren’t payroll systems or charities. To approach providing payments to retirees from that perspective would put persons at an already vulnerable stage of life in an even more precarious circumstance. If one is 29 years old and gets laid off from a job, there is the likelihood of getting another. If one is 79 years old and faces the possibility of being “laid off” from a pension plan, there is little chance of finding another plan to provide monthly income. Further, I’m glad pensions are not charities. Retirees should not have to prove how destitute they are in order to receive a regular income. To that end, pension plans preserve a basic dignity simply in the way they are structured.

I hope these comments provide some perspective regarding pension plans. Perspective is important. I know it calmed a good deal of fears when I was a small child. By the way, speaking of perspective, we should always keep in mind that our ultimate retirement benefits are “out of this world.”

Don Walter is director of Pensions and Benefits USA for the Church of the Nazarene.

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