Many public and private pensions have been underfunded. That could mean shrinking benefits, smaller cost-of-living increases and later retirements. Here's what you can do.
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 401(k)’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 Walmart. 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 401(k) 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? Tell us about it in the comments below or on our Facebook page.