From “How Safe Is Your Pension?” in the July 2012 Consumer Reports, comes a stark assessment of the current pension landscape:
If you’re counting on a traditional defined-benefit pension, there’s reason to worry that you might not get everything you’ve earned. About 80 percent of the 29,000 private-sector defined-benefit plans insured by the federal Pension Benefit Guaranty Corp. have been underfunded by $740 billion. State and local public employee pensions were recently in a $1 trillion hole.
Instead of beefing up plan assets, many companies have cut benefits. Employers can change their pension rules going forward using a variety of tactics, including tinkering with benefit formulas so that your eventual payout will be reduced, “freezing” the plan to stop further accruals, or terminating an underfunded plan.
“Vested” pension assets—those that legally become your property after a period of time—are generally safe thanks to federal law. But if the plan is terminated, the PBGC, which itself is $26 billion in the red, is required to pay vested benefits only up to a certain amount, which varies by the employee’s age and the year in which the plan is terminated.
Pensions of government workers aren’t covered by the agency but are often protected by state constitutions or laws. Still, 26 states have squeezed benefits for new hires, some other workers, and retirees.
Finding ways to back out of promised retirement benefits and/or reducing benefits for new hires is going to be a dominant theme in the pension world for many years to come. For a flavor of current pension reform efforts consider the current proposal for public employees in Illinois:
Gov. Pat Quinn is proposing to raise the retirement age to 67 from 55; cap retirees’ annual cost-of-living increases at the lesser of 3% or half of the consumer price index; and increase workers’ pension contributions by three percentage points. But what makes these reforms bolder than most other states’ is that they would apply to current employees in addition to future hires.
As financial advisors, we are in a unique position to help people deal with these realities. Right at the top of the list of things that we can do to truly help our clients is to help them come to terms with the pension reforms that are and will be taking place in the coming years and adopt an appropriate savings and investment plan that accounts for these changes. The pressures to scale back pension benefits will be like nothing seen by the last generation of retirees.
