Introduction to Pension for Kids and Teens
This video explains the concept of pension in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about pension plans, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- Definition of pension: What is a pension
- Requirements to qualify for a pension
- Different types of pension plans
- Disadvantages / downsides of a pension
What is a pension? And how does a pension work?
Pension or pension plan, also known as defined-benefit plan, is an arrangement offered by an employer that gives an employee regular payments in retirement – usually every month.
When the employee is working, the employer sets aside some money and puts it into a pension fund that’s managed by the employer.
If an employee qualifies for a pension, money from this fund is given to the employee as pension when they retire.
Many government organizations offer pensions, while private companies usually don’t.
Who gets a pension – What are the requirements to qualify for a pension?
Pension is provided to incentivize the employees to stay with the company for many years. So the most important criteria to qualify for pension is that the employees must have worked at the company for a certain number of years.
The amount of money that an employee will get as pension also depends on a variety of factors – including the number of years they worked at the company, how old they were when they retired, and their income when they retired.
Depending on the terms of the pension plan, they may lose some or all of the pension benefits if they quit their jobs before retirement.
However, it is important to note that many employers do not offer a pension in the first place.
Are there different types of pension plans?
The only true pension plan is a defined benefit plan, where the employee gets a defined amount of money at fixed intervals for their entire life, starting when they retire. The contributions are mostly or entirely by the employer, who manages the investments and guarantees the payment irrespective of how the pension fund performs.
However, because of how expensive these plans can get and the liability to the employer, more and more employers are moving towards defined contribution plans in their benefits packages, where specific contributions are placed into an investment account by the employer, employee or both.
The amount of money the employee receives is dependent on the performance of this investment.
One common defined contribution plan is a 401k, where the employee takes on the responsibility of investing and managing the account.
Pension seems too good to be true! Are there any downsides?
While on the surface pension looks like guaranteed free money in retirement and financial security for life, it has its own risks.
First of all, very few employers offer pension. Secondly, while it may not be apparent, at least a part of the money for a pension plan comes out of the employee’s salary, meaning that they will get less money in their paycheck if the company offers a pension fund.
And unless the employee stays with the company long enough to qualify, they won’t get any pension at all. Also, if the company goes bankrupt or the pension plan is underfunded, the employee won’t get the promised amount.
For these reasons, even if your company offers a pension plan, it’s best to also save and invest on your own.