By Olivia Mitchel

The U.S. Treasury department’s move last month to allow private companies to pay lump-sum pension payments to retirees and beneficiaries, instead of monthly payments, is good news for companies that do not want to be saddled with long-term pension obligations – particularly for private sector employers who have underfunded pension plans.
However, lump-sum pension payments may not work out well for retirees who opt for them. While a debate has ensued on the merits and risks of lump-sum pension payments for employees, there are also wider concerns about the long-term impacts on the entire economy when retirees do not have sufficient financial resources to support themselves. Those concerns are assuming a new importance because of the rapid growth of the so-called gig economy with temporary workers and freelancers who don’t enjoy employer-sponsored retirement benefits.
The Treasury department’s latest move reverses an Obama-era pledge to bar employers from offering lump-sum payments. The fear was that those receiving a lump-sum payment might be shortchanged and also might be tempted to spend the money sooner. Around 26.2 million Americans receive pensions right now, though that number has been declining as businesses favor 401(k) plans instead.

How Companies Gain
Defined-benefit plans are pensions that provide beneficiaries with a monthly benefit check for as long as they live. Defined contribution plans stipulate only the contributions to an employee’s account each year. “The concern with companies offering defined-benefit plans is that they need to manage carefully around future mortality, around investment fluctuations, and so forth,” said Olivia S. Mitchell, executive director of the Pension Research Council at Wharton and director of the Boettner Center on Pensions and Retirement Research. Mitchell is also a professor of insurance and business economics at Wharton.

Source @knowledge.wharton.upenn