In every business in the world always needs to ensure revenues are higher than expenses to survive. It is a simple formula but when times are good, there is always a call for more costs for the company to bear. The cycle is never ending and many companies try to strike some sort of balance. It is one of the prime reasons company’s pension plans have moved from defined benefit to defined contribution. The first the emphasis is on the employer to have the pension funded, the second the emphasis is on the employee. There are strengths and weaknesses to both, but achieving a balance is important.
In Europe, they have a history of electing governments who wish to give the people full pensions earlier in life. For a long time that was a good thing, The normal life expectancy was less than 70 years of age and lowering full government pension from 64 to 62 meant more votes from older people. The problem with the system is people are living longer and there are fewer young people paying into the system. What should the government do as people live longer?
In an article by John Irish, Noemie Olive and Ingrid Melander of Reuters, the government of France is trying to save billions of dollars to keep the pension system in positive territory. The government believes by increasing the retirement age from 62 to 64, the payments would yield an addition $25.2 billion in contributions allowing the system to breakeven by 2027. On the negative side, hundreds of thousands of people like or are expecting to like the process of full benefits by age 62 rather than 64. The French spend the largest number of years in retirement among OCED countries and polls show a substantial number of people are reluctant to give it up. The French may like the President, but they like the benefits better.
Linking to dividend paying stocks, when a company is consistently profitable and can pay dividends, there are and will be constant demands on it to do more. As a shareholder, you want your expectations to be meant first, then the company can do what it can or desires to do with its other pieces of the pie. All company must keep an eye on costs both it good times and not so good times, it ensures the company can be consistently profitable. If you think your company is not worrying about costs, it is time to find alternatives.
There are more questions than answers, till the next time – to raising questions.