Could your pension vanish? 5 defensive moves
Many public and private programs have been underfunded. That could mean shrinking benefits, smaller cost-of-living increases and later retirements.
This post comes from Marilyn Lewis at partner site Money Talks News.
Juicy pensions and benefits are one big reason workers are attracted to government jobs. But because cities and states have underfunded their pension programs and the bills are coming due for a large generation of retiring workers, it's becoming clear that many state and municipal governments have promised bigger pensions than they can actually deliver.
The problems are with "defined-benefit pensions," the kind that promise a specific payout after retirement. They're more expensive for employers than 401k’s, which put more of the burden to save on workers.
What 'pension reform' means to you
"All told, U.S. state and municipal pensions are underfunded by at least $1 trillion, and perhaps much more," Bloomberg reports.
Underfunded pensions cast a shadow over corporate workers' retirements, too. In 2012, S&P 500 companies put aside only 70 percent of what was needed to cover obligations to retirees, according to research by Dow Jones.
"Pension reform" is the movement to adjust pensions to fit the money available. Some employers need only to tinker in ways that won't much affect workers. In other cases, though, shortfalls may hit workers and retirees with shrinking benefits, smaller cost-of-living increases and later retirements.
General Motors, Ford and Verizon Communications, for instance, are trying to trim their funding gaps by offering annuities and lump-sum payments to some current retirees, says CNBC.
Pressure to cut pensions
Bankrupt cities like Detroit and Stockton, Calif., are under intense pressure to cut pension costs. Detroit has proposed cutting the pensions of 30,000 current and former city workers, Bloomberg writes.
The shortfalls are due in part to employers' unsustainable promises and their failure to put enough money aside to fund those promises. Also, says USA Today, "Pension funds took a beating in the stock market during the Great Recession, and combined with increasing numbers of retirees — and in some cases, extra benefits given during boom years — have seen their unfunded liabilities grow."
One retiree's story of survival
Cuts that hit people who are already retired are the worst since retirees have few ways if any to make up the loss. Some can return to work, but often at a reduced wage.
Bobby Shields, an electrical engineer, retired in 2007, only to have his pension cut by 34 percent. He told MSN Money how he survived by landing a part-time job at Wal-Mart. Not all are so lucky. For many living on the edge, a benefit cut can mean a slide into poverty.
Shields' benefits were reduced after his former employer went bankrupt and his plan's management was taken over by the U.S. Pension Benefit Guaranty Corp. The PBGC insures most private-sector pension plans. (Learn if your plan is protected and learn rules and details.)
Generally, retirees' pensions are safer than those of current workers because retirees' benefits are already funded, wrote Liz Weston at MSN Money.
5 steps to protect yourself
Whether you are retired or still working, in this era of constant change it's smart to hope for the best and prepare for the worst. Here are five steps workers and retirees should take to protect themselves:
- Keep track of your plan. The Pension Rights Center tells how. Read and keep annual benefit and funding statements you receive from your pension plan.
- Learn more. Find news and guidance about pension rights at the Pension Rights Center. Locate pension counseling services in 30 states here.
- If you're retired. Build up your emergency cushion by adding to savings and living within your means. If you're still supporting adult children, cut the cord now. They have time to earn back their losses. You don't.
- If you're an older worker. Stay on the job longer to beef up savings while you still can. Also, working longer protects your savings by putting off the day when you must start spending them. Delay claiming Social Security, even to age 70 if you can. Kill your debt and write its obituary so you can enter retirement debt-free.
- If you're a young worker. Stop counting on any defined-benefit pension you may have. Assume you’ll need to get along without it. Fund your 401k as fully as possible and claim every penny of your employer's match. Get out of debt, double down on saving, and get serious about tackling your overspending.
Are you worried about the stability of your pension?
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This is FALSE if employers are required to contribute to defined benefit pensions (DBP's) like they do to 401k's. In fact, DBP's require about HALF the contributions of 401k's to achieve the same payouts (see: http://www.nirsonline.org/index.php?option=com_content&task=view&id=122&Itemid=61).
THINK about it. 401k's are put into funds according to the wishes of people who read a four page brochure then think they know everything about investing. And even if they did, they're not in a position to make changes in their portfolio as fast as pension fund managers. But an even bigger problem is the unethical fees Wall St. applies to such funds. Vanguard's John Bogle states that Wall St., without risk a single cent of its own money, skims 60% of all gains from a typical 401k over its lifetime. Investigative reporters have checked it out and found Bogle correct.
GE, Otis Elevator, and many other private companies have no trouble funding DHBs because they don't short the funding.
Some governments pay unsustainable pensions, which are exacerbated by governors shorting the amounts paid into the pensions. They need to be modifed but not abandoned.
Note that a typical teacher - who may have a lot of weeks off but still puts in 300 hrs/yr more than the average worker - starts out making LESS than a starting county sanitation worker. It takes about 15 years before the typical teacher reaches a decent wage through step raises. The very Conservative Forbes Magazine rates teaching -including benefits- as the 3rd lowest paying career requiring a 4-year college degree. And today the degree usually has to be in chemistry, biology, math, foreign language, etc. in addition to education. Then the teacher has to achieve a masters degree within a certain number of years of teaching.
Is it any wonder that even in this recession a lot of places like Chicago and Louisiana recruit teachers from 3rd world countries to teach kids. 10% of Baltimore's teachers are from the Philippines. Many are barely understandable. Without pensions to make the low salaries tolerable the number of American teachers will plunge to awful levels.
The State of Maryland, around 1980, and the Teacher's Unions agreed the state's teachers pension was unsustainable and it was drastically cut back and teacher contributions began. Today, compared to final working salary, Maryland's teachers get 2/3 to 3/4 of what any surrounding state's pension pays, despite the fact Maryland has the highest avg. income in the USA.
Today, teachers contribute 5% and local employers another 9.35%. The state provides absolutely NO benefits - retirement health insurance is partly subsidized effectively by the working teachers taking a hit in contract negotiations to compensate their county's supplying it. They're willing to do it because they know they'll get it when they retire.
As a result, it's been estimated that even if incompetents ran Maryland's pension funds, it would take about four decades before it ran into problems because nearly as much non-state funds are pouring into the pensions as are being paid out.
So I, a retired Maryland teacher, have no fear of my pension disappearing or some bureaucrat deciding I don't need excellent supplemental health insurance.
And it's not costing anyone more than it should.
To: Current (Me-Me) employees
You don't believe funding is important; you prefer your current high raises over funded pensions, and enjoy current high living.
Enjoy your rich retirement...because you have loads of money to spend!
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