What Happens if They Freeze My Pension?

Courtesy of Jim Lange, author of Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do (Wiley, 2006, ISBN: 0470043547)

If my company were to freeze my pension, what would happen to my retirement income? It’s a valid question, and one that many workers are asking in light of the controversy stirred up by the newly passed Pension Protection Act of 2006. According to CPA and attorney Jim Lange, there are too many variables involved to provide a standard, across-the-board answer. However, he is willing to share a specific example developed by Jack Van Derhei, a professor at Temple University and research director at Employee Benefit Research Institute (EBRI):


1. A worker joins a company as he or she turns 30 and expects to work until age 65.

2. The company provides a “final-average defined benefit” pension plan, which promises employees a benefit calculated by multiplying the number of years worked times the average of the three highest years of pay times one percent.

3. The worker is now 50 and is earning $70,000.

4. The worker’s pay goes up by three percent every year.


Based upon these assumptions, our worker will be making $105,881 when he or she is 64 and the average of our worker’s three highest paid years will be $102,827. If the pension plan remains in place, the worker’s annual benefit would be $35,989 (= $102,827 x 35 x 0.01).

If, however, the pension plan gets frozen while our worker is 50, his or her high-three average would drop to $67,980 and the years of service would only be 20. This scenario would decrease his or her annual pension benefit, beginning at age 65, to $13,596 (= $67,980 x 20 x 0.01).

Based on these calculations, our worker is left with a $22,393 gap per year to make up for that lost pension benefit. According to Van Derhei, this worker would have to accumulate $299,536 in their 401(k) to buy an annuity to fill this gap created by the pension freeze.

In order to accumulate that amount in our worker’s 401(k) by the time he or she retires, Van Derhei surmises that, assuming a reasonable asset allocation strategy and expected returns, our worker (and/or employer) would have to contribute 12.87 percent of his or her pay for each of the succeeding 15 years.

“As this example clearly demonstrates, for most American workers a pension freeze will result in a substantial setback in their ability to provide themselves and their families with a comfortable retirement,” concludes Lange. “It is critical to provide for such a possibility. Open an IRA now and contribute as much as you possibly can. Even if you are one of the fortunate few who receives your full pension, you’ll appreciate the extra income.”

Alan Gray is the Publisher and Editor-in-Chief of NewsBlaze Daily News and other online newspapers. He prefers to edit, rather than write, but sometimes an issue rears it’s head and makes him start hammering away on the keyboard.

Content Expertise

Alan has been on the internet since it first started. He loves to use his expertise in content and digital marketing to help businesses grow, through managed content services. After living in the United States for 15 years, he is now in South Australia. To learn more about how Alan can help you with content marketing and managed content services, contact him by email.

Technical Expertise

Alan is also a techie. His father was a British soldier in the 4th Indian Division in WWII, with Sikhs and Gurkhas. He was a sergeant in signals and after that, he was a printer who typeset magazines and books on his linotype machine. Those skills were passed on to Alan and his brothers, who all worked for Telecom Australia, on more advanced signals (communications). After studying electronics, communications, and computing at college, and building and repairing all kinds of electronics, Alan switched to programming and team building and management.

He has a fascination with shooting video footage and video editing, so watch out if he points his Canon 7d in your direction.