How Does A Wage Freeze Affect an Unfunded Pension Liability?

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    • A wage freeze means that you do not get a raise. This not only affects your current income but also affects future income. Pensions are often calculated as a function of your years of service and your salary during your working years. If your salary does not increase, your pension benefits will be less than expected.


    • You are essentially losing money when your employer imposes a wage freeze. Future promised benefits do not materialize. This also means that you may have to work longer than you had expected, and you also may need to increase your personal savings to make sure you get the income you want and need in retirement. This may, in turn, reduce your take-home pay and significantly alter your current lifestyle.


    • You may contribute money to an IRA or 401k plan, if your employer offers the latter. You may use life insurance and annuities to enhance your retirement pension. This will actually mimic a real pension plan. Fixed cash value life insurance and annuity policies form the basis of many pension plans, like 412i plans and other defined benefit pensions, because they provide guaranteed savings for the pension as well as a means to guarantee pension payments. The guaranteed pension payments are derived from the fact that the insurance contracts pay a fixed rate of return that is guaranteed for the life of the contract. By using these contracts, you get the benefit of a pension without actually being in one.


    • Consider increasing your personal savings. Even though this means altering your lifestyle, the alternative is not retiring according to your previous plans. If you decide to use life insurance and annuity policies, keep in mind that your insurance policies may require higher contributions than other types of investments. This is because conservative insurance policies that guarantee a payment to you are fixed interest insurance contracts. These policies pay a low rate of return in exchange for the guaranteed payment when you retire.

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