Pensions

If you are one of the millions of Americans who plan to rely on government pension benefits following retirement, it is extremely important that you check your plan to make sure that no adjustments have been made and above all else, take very little for granted going forward.

While it is true that most state and local pension plans have yet to be affected, a growing number of plans have already begun to make structural changes to ensure that they are able to fulfill future obligations or, simply put, make good on their pension payouts after you retire. Not surprising when you consider some reports claim that government pensions in this country are currently only 75% funded, meaning that much of the money you are expecting to receive upon retirement simply does not exist. So where will the remaining 25% come from? Well, the easy answer is to increase what you pay in to the system while decreasing what they ultimately pay you (many would argue that the easy answer would be to start phasing out public sector pensions altogether, but that is a different article for a different time).

Regardless of what state you work in, the odds that new employees will one day be able to enjoy the same pension benefits as those already retired are next to zero.

Actions currently being taken by some plans include:

  • Reducing or capping pension benefits
  • Raising retirement ages for new workers
  • Asking employees to contribute more to their retirement plan
  • Reducing or eliminating cost-of-living adjustments (COLA) for new and/or current employees.

Still others are scrapping and renegotiating contracts or worse, laying off employees. This is not at all unlike private companies having to make cuts to their employees’ retirement or health care plans; the major distinction is that when it happens in the public sector, the potential ramifications are exceedingly far-reaching.

At first glance, the vast majority of Americans who will not be relying on government pension benefits may view this issue as a problem only for those who are. Unfortunately, many state and local governments with grossly unfunded pension liabilities are beginning to look beyond making cuts to pensions themselves. In order to compensate for such liabilities, the possibility of reduced funding for municipal services- including hospitals and schools- as well as an increase in taxes is, in many cases, a real one. Those in the field refer to such measures as “distributing the pain” and are quick to note that the “pain” may be felt more and more by those who would appear to be innocent bystanders. In other words, this is a problem that may affect entire communities, not just those individuals who are set to receive pension benefits after they retire.

Most experts agree that retirees already receiving their pensions will largely be unaffected, with the possible of exception of a reduction to their COLA. Betty Meredith, the Director of Education and Research for the International Foundation for Retirement Education, contends that, “The pain is overstated right now because interest rates are at historical lows, which means retirement systems have to put more money into the plans and most plans appear underfunded.” Nonetheless, financial advisors across the country are encouraging those reliant on government pensions to take the necessary precautions.

Regardless of what state you work in, the odds that new employees will one day be able to enjoy the same pension benefits as those already retired are next to zero. Most advisors would likely recommend that you anticipate an increase to your required contributions at the very least. You may also consider taking a look at a scenario in which your future fixed income were reduced (say by 20%) and adjusting your budget- and perhaps your portfolio- accordingly, just to be safe. That way, in the unfortunate event that reductions are in fact made to your pension plan, you will already be well-equipped to manage them in stride and avoid having to prolong your retirement.

If you would like to understand more about pensions and how to plan for your future, call our office at 1-877-257-0057; we can review your pension plan and help you understand and make decisions so that you can enjoy your retirement.

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