Saturday, September 23, 2017

We're all going to face an "interesting" retirement

No matter how near to or far from retirement we are, the current parlous state of the US pension and retirement funding "industry" is far from comforting.  Just this week, one million Ohio state pensioners learned that their cost-of-living allowances may be cut "as a way to shore up the long-term finances of the fund".  We also saw how Illinois must contribute $130 billion - which it doesn't have - to eliminate the backlog of its state retirement fund.  We learned last month that Kentucky's state pension system is in dire straits, and may have to drastically cut benefits and payouts.

Some states are now trying to force private workers to become members of, and contribute to, state pension plans.

California just passed a law to force 7.5 million private sector workers to pay into the state retirement system. In this, the Golden State joins Illinois, Connecticut, Massachusetts, Oregon and Maryland. Of note is that these six states rank from having the 2nd to the 13th-worst unfunded pension liabilities in the nation, with Illinois’ pension debt estimated at $77,822 per household according to the Stanford Institute for Economic Policy Research Pension Tracker website. Minnesota is actively studying the issue; they have the 18th-highest per unfunded pension liability. New Jersey’s legislature passed a bill to expand its state retirement system to non-government workers, but Gov. Chris Christie intelligently vetoed the plan.

Why are the weakest government pension systems seeking to force private sector workers to pay into their accounts? There are four reasons: the infusion of new cash can help the balance sheets; millions of additional voters will be made more dependent on government programs; those same voters will be invested in ensuring that state-run pension systems are adequately funded; and the political appointees and politicians who oversee those retirement systems will have billions more in investment leverage to pressure corporations to bend to their progressive demands.

There's more at the link.

Pension problems aren't limited to the public sector, either.  Corporate pension plans are also underfunded to a very large extent, and private pension savings in IRA's and 401(k)'s are less than optimal, to put it mildly.

Basically, if you're depending on any pension fund - public or private - to ensure a comfortable retirement, you need to be rethinking that right now.  The odds are good to excellent, IMHO, that you're going to be disappointed.  As for those already drawing a pension, the odds are getting better all the time that their benefits will, at the very least, not keep pace with the real rate of inflation.  In many cases, those benefits may be reduced (see Kentucky, for example, as mentioned above).

I recommend reading these articles to get a better sense of what the future holds for US pensions in general.  (The last article is the most recent, and a good summary of the current situation.  Even if you don't read the others, I urge you to read that one.)

I also recommend following Pension Tsunami, for regular updates on state and government pension systems.  Remember, if those systems need funding, they get it by taxation - and that means their problems will inevitably affect each and every one of us.

I don't know that I'll ever have enough money to pay for my retirement, having initially saved for retirement in another country whose currency has almost collapsed under the weight of prolonged inflation, making it meaningless in US dollar terms;  and, after coming here, I earned a very low clergyman's salary for many years, with no private pension savings possible.  I suspect I'll be writing books as long as I can!

(Of course, it's only relatively recently that people came to expect to "retire" at all.  Right up to World War II, the expectation was that one would work as long as one was able, then rely on one's children to help out for one's few remaining years of life.  With today's much smaller families, that's not likely to work out very well . . . )



Divemedic said...

The public pension system in Florida came about during the 80's because the private sector was hiring all of the talent away from the public sector, because the Reagan tax cuts combined with improving economic conditions guaranteed that governments couldn't afford to increase wages enough to compete.
So the government employers rightly figured out that those conditions couldn't continue forever, so they deferred increased raises by creating a pension system. However, they blew the system out of the water when they spent the money on social giveaway programs, rather than contributing to the pension systems. As anyone saying for retirement knows, compound interest is what makes retirement savings work.

Flash forward 30 years, and the bill is coming due for those pensions that were promised during the 80's. The money isn't there, because they spent it. The lesson here is that the same thing is going to happen to Social Security.

Pensions aren't the problem.
Social Security isn't the problem.
The uncontrolled spending IS the problem, and there is no going back to fix it. The day is fast approaching when the bill is going to come due, and we don't have the money to pay it. This is going to hurt. Look at Greece to see the future.

paladin3001 said...

I used to joke that my retirement plan was to work until the last day and be found the next morning dead at my desk. I don't think that's a joke anymore.

SiGraybeard said...

To follow up on Divemedic, Florida's public pensions are in relatively good shape, compared to the other states, typically ranking around #10 out of 50 in fiscal health.

The private sector plans are essentially funded in the world's stock markets, so exactly how they'll fare depends on exactly how they're allocated. That probably holds for 401k accounts too, because they tend to be allocated to "stocks and bonds". Think of private pension plans as independent of the government mess, but your income is always - always - influenced by taxes.

There's a very important bottom line here that nobody talks about. Nobody can guarantee the future, so if you're planning on putting your retirement based on any contract whatsoever, you're at risk. If you're putting money in cash buried in the backyard, that devalues at the rate the Fed creates phony money. Your plan needs to return earnings but nobody can guarantee earnings that exceed actual inflation. There's always systemic risk involved.

A Texan said...

Another issue is that almost of these public pensions are invested in the stock market. If you work for the state of Texas, there is ERS, TRS, TMRS and a 2 or 3 others I've missed. Not a bad deal if you are state or municipal employee, but even if you put money aside where else can you go but the stock market? And what is going to happen when more of those companies go under and everyone is chasing the same pie for dividends? It's already overvalued because of all the forced money from 401ks, public pensions, and I would guess insurance companies and maybe even European countries creating money from thin air to invest in it as well.

MrGarabaldi said...

Hey Peter;

My biggest concern is getting my 401K that I have been contributing over the max for the past 25 years gets seized to shore up social security because the government can't control its spending. People tell me that I am paranoid, and I respond"there is precedence from other countries". they keep throwing out the "its not fair that people have to live on social security" My attitude is that "nobody takes good care of an old you than a young you." With my 401K, I can transfer the assets to my family whereas a government pension plan, you can't. They want to keep as much of the money as they can.

Jess said...

Public employee pensions were never properly managed, unrealistic, and the private sector was always thought of as an endless cash cow for the whims of bureaucrats.

While this is a terrible thing, I have the feeling what will be proposed, or regulated, will be more terrible.

Anonymous said...

I worked my ass off for the last 45 years, looking forward to full retirement in a year or two.
I hope Soc. Security lasts as long as I do...


Habakkuk21 said...

I'm a retired public school educator, and I have 24 years invested in that plan. I have also drawn Social Security since I had to medically retire 10 years ago this month. The two monthly checks are very nice, but that's NOT free money. I paid into both systems, starting in 1969 for Social Security and 1977 for the Teachers' Retirement System.
However, it's likely, since I had to retire so young, and the cause of my medical retirement isn't going to kill me, that the amount of money I'm drawing out will exceed what I paid in. That means I'm going to be funded by the taxes on people who are working now.

However, there is ONE party of my retirement plan that's about as safe as I can conceive it being: my house. I bought this house with a 30-year loan in 1992, and in 2005, refinanced it to a 15 year loan with a lower interest rate. So, I'll make my last house payment in December of 2020 (if we/I are still here then).

Food, shelter, clothing: that's what comes to mind first. Medical expenses are going to mount as I get older. I have gritted my teeth and refused to buy new vehicles except as absolutely necessary.

But it seems to me that a good retirement plan won't be linked to money, but will include a debt-free home and transportation at a minimum.