Until recently, most workers expected to retire with a pension that would provide them with a fixed source of income for the rest of their lives. The pension, combined with some income and health benefits from the governmentıs Social Security and Medicare programs would, they reasoned, allow them to have sufficient income to retire. Familiarize yourself with the terms below to help you understand the major shift that has occurred in retirement planning and benefits.
Part One Directions:
Review the following terms prior to watching the documentary.
- Pension: A sum of money paid regularly as a retirement benefit; money paid under given conditions to a person following retirement or to surviving dependents.
- Defined Benefit Plan: A pension plan in which the amount of benefits paid to an employee after retirement is fixed in advance in accordance with a formula given in the plan.
Note: The amount contributed is fixed, and so is the benefit.
- Defined Contribution Plan: A pension plan wherein a certain amount or percentage of money is set aside each year (by either the company and/or the employee) for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties.
Note: There is no way to know how much the plan will ultimately give the employee upon retiring, because only the contribution, not the benefit, is defined.
- 401(k): A type of defined contribution retirement account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds or other assets, and are not taxed until they are withdrawn. The retirement savings vehicle gets its name from the section of the Internal Revenue Code that describes it: Section 401(k).
- Health Benefits: Benefits (compensation in addition to salary) that may be provided to employees for sickness, accidental injury, or accidental death. These benefits generally include payment of hospital and medical expenses.
Employers are not obligated to provide health benefits to their workers. When employers do not provide health benefits, increasing numbers of people either cannot afford or choose not to purchase them.
- Social Security: A federal benefits program developed in 1935, Social Security is funded through a tax levied on employers and employees. The program includes retirement benefits, disability income, veteran's pension, public housing, and even the food stamp program.
- Medicare: A federal program that provides some level of health benefits for people over age 65 or who collect Social Security for [OR INSTEAD OF FOR?] disability.
- IRA (Individual Retirement Account): A special type of account that allows investors to make tax-deductible contributions. The money can be invested in stocks, bonds, mutual funds, etc., and the earnings grow tax-free until the account's owner turns 59 1/2 years old. At this time, the account holder is allowed to begin withdrawing money from the account to fund their retirement.
Note: Eventual withdrawals are treated as ordinary income and may be subjected to income tax. However, since income is likely less once you retire, you may be taxed at a lower rate.
- Roth IRA: Roth IRAs allow investors who do not exceed a specific income level to contribute a limited amount of money toward retirement annually. Unlike the traditional IRA, the contributions are not tax deductible. However, Roth IRA account holders are not taxed when they begin withdrawing money at or before retirement (subject to certain rules and regulations).
Part Two Directions:
Review the questions below before watching the film and be prepared to answer them after you view the documentary. Take notes as you watch to help you in the discussion that will follow.
- 401(k) plans were authorized by Congress in 1978 and became popular in the 1980s.
- What was the original purpose of 401(k)s?
- What is their role now?
- Discuss what Harvard law professor Elizabeth Warren means when she says in the documentary: "Bankruptcy is a way to take legal promises and burn them."
- After United Airlines declared Chapter 11 bankruptcy, one person in the documentary says, "Everyone lost except Tilton [United's CEO] and the banks." Based on what you saw in the film, explain what this statement means.
- Name three specific ways that the life of United Airlines flight attendant Robin Gilinger changed after United Airlines restructured.
- All workers do not participate in 401(k) programs.
- Give one reason why some workers do not participate.
- Give one factor that correlates to which workers will be successful with their 401(k) investments.