Where Does Your Pension Come From?

Your pension, and all your benefits in fact, are part of your hourly salary. Yes, already though it may not appear on your pay stub, it is in fact part of your hourly wage.

Heres how:

When companies price their product, they include all the production costs for the product or service and then add profit. The production cost includes your burdened rate which is the cost of your actual hourly salary plus the cost of your benefits, plus the cost of your proportion of heat, lights, your desk, computer, and any other tools or factory space, divided by the actual number of hours you work (usually 1800 hours).

Wait you say, 40 hours a week times 52 in a year is 2080 hours! True, but you have to subtract the two weeks vacation, one week sick time and about 11 holidays. Thats 80 hours vacation, 40 hours sick leave, and 88 hours holiday for a total of 208 hours you get paid for but dont truly work. Subtract that from 2080 leaves you with 1872 working hours. Rounding that to 1800 makes for simple calculations and includes a little cushion for unexpected time off.

Burdened rate = (((employees salary + cost of employees bennies) + employees proportion of infrastructural costs) / 1800 annual work hours). I stole this equation from Wiki Answers.com

What do the parts of the above equation average? Your salary is the actual rate of pay you earn each hour, say $18.00 just to pick a number. If you pay $200 a month (fifty bucks a week) for health care you can figure your company pays about $200 a month also (your total health care cost is really about $400.00 a month). Take $200 times 12 months and you get $2,400 a year and divide by 1800 hours and you get $1.34. Your company adds that to your hourly rate. Do the same thing for your pension benefits and any other perks your company provides. If they give you a cell phone that cost is calculated into the hour rate and additional to find your total cost to the company. Your burdened rate also includes the part of your social security that your employer pays.

Suppose your pension after 25 years works out to $1,000 a month, your company starts paying at 65 and you are expected to live to 85 then the company will pay $1,000 for 240 months (12 months times 20 years) or a total of $240,000. Divide that total by the number of years you worked, say 30 then divide by 1800 hours.

(240,000 / 30 = 8,000) / 1800 = $4.45 per hour

I know Im over simplifying the equation since the company doesnt just put the cash in a vault. They invest in something that pays them interest so that the actual hourly cost is much lower, but this will work for our simple purpose.

If you make $18.00 an hour, your actual cost to the company is $22.45 per hour. You nevertheless have to add in the employers contribution to social security, health insurance, workers comp, heat, lights, tools, etc. As a rule of thumb, those costs are at the minimum equal to your hourly rate or a total of $36.00 per hour. If your company provides generous benefits then you might figure three times your hourly rate or $54.00 per hour burdened rate.

So for every part you make or piece of paper you manager, your company must charge the customer $36.00. If you work on an assembly line and make 6 parts per hour it takes you 10 minutes per part and just your labor costs the company $3.60 per part.

When they figure out what to charge the customer, they add that $3.60 to each and every part. Wait, that number included the money to pay your future pension! The company isnt giving you anything; the customer is paying today, as part of the buy price for each part you made, money the company wont pay until you retire.

If the company already collected that when they sold the product, how come you keep hearing talk from your elected officials and the press about the huge legacy cost of autoworkers pensions? Because, either the person speaking or writing has no clue where and how pensions are paid for or they have a vested interest in lying to you.

Back in the mid 1960s the government borrowed from the social security fund to pay for social programs called the Great Society. They expected to pay the money back later. This mixing of funds worked so well for the government that business lobbied for the same privilege.

If you saw the movie Wall Street, you should remember that Gordon Geko didnt want to buy the airline Charlie Sheens father worked for to run it, he wanted to close out the pension fund, spread the cash and position to pay the future pensions from future income. Now, the character in the movie really knew that there wouldnt by any money when those pensions came due, but since he expected to sell the company long before then, what did he care?

The automakers did the same thing, collected money for future pensions as each car was sold and then didnt put that money in a separate account, they used it to cover current expenses. Now as the bill is coming due, and the companies have to truly pay the pensions, they are poor mouthing about legacy costs. Its not the actual cost of the pensions that is the problem; it is years of bad money management by the automakers senior management thats the problem.

The right way to look at it is that your real salary is the sum of your hourly rate PLUS all the benefits your company pays. If you had to buy them yourself, you would have to make that total wage. Just using your hourly rate of $18.00 plus your pension cost of $4.45 your total hourly wage should be $22.45 and you buy your own pension; your company is off the hook.

So, if you have a pension now and your employer says We are cutting pensions next year because its just too expensive where measure that $4.45 per hour they used to pay go? Why into the companies profit of course!

So if you now have to buy your own pension and pay that $4.45 times 40 hours, you will have ($4.45 x 40) $178 a week less take home pay. Most honest people would call that a pay cut.