Picturing Pensions

Photo Credit: Tori Barratt Crane || "When is the next pension check coming, dear?"

Photo Credit: Tori Barratt Crane || “When is the next pension check coming, dear?”

I’ve seen a small group of pension articles in the recent past, none happy:

  1. Europe Faces Pension Predicament
  2. More Companies Freezing Corporate Pension Plans
  3. The Tragedy Of California’s Public Pensions
  4. Retirement Is Looking Even Worse for Americans

A defined benefit pension is a stream of payments that continues until the beneficiaries die, mainly.  It is funded from the assets set aside by the sponsor, and the earnings that flow from them, as well as additional contributions, should the assets not be enough.  With municipal pensions that means taxes.

Pension benefits are like debt, and sometimes more so.  What I mean is this — pension benefits earned can’t be reduced, except in bankruptcy.  Many states give municipal pension payments preferential treatment, so troubled municipalities can’t compromise pension payments easily, even in bankruptcy, if allowed.  (The main point of the third article is that underfunded pension plans in California will lead to taxes rising further, or, some sort of compromise, with a huge political fight either way.)

In principle, if defined benefit pensions had been funded properly, there wouldn’t be a lot of furor over them.  From inception, funding rules were not conservative enough, particularly in what plans could assume they would earn off investments.

Thus the second article is no surprise.  From my start in investment writing over 20 years ago, I predicted that more corporate pensions would get frozen, terminated, and replaced with defined contribution plans.  Plans assumed too much in the way of investment earnings. Sponsors contributed too little, encouraged by the IRS, that wanted more tax revenue, and thus limited the amount sponsors could contribute.

Things could always be worse, though… many nations in Europe will undergo a lot of strain trying to pay all of the benefits that were promised.  Here’s a quotation from the first article:

“Western European governments are close to bankruptcy because of the pension time bomb,” said Roy Stockell, head of asset management at Ernst & Young. “We have so many baby boomers moving into retirement [with] the expectation that the government will provide.”

Even the U.S., with a Social Security trust fund of $2.8 trillion, faces criticism for promising more than it can afford. That is because the fund—which is mostly in the form of IOUs from the Treasury—is projected to fall short of the sums needed to cover all benefits in a dozen years or so, and run out in 2035. Europe’s situation is much worse.

When taxes are already high, and because of demographics, the ratio of workers to pensioners is falling, it gets difficult to figure out what many European governments will do.  It will be a political fight.  Think Greece — but more widespread.

And from the article, one thing that all should expect is that older people will work to supplement their economic needs — the homey example was the lady raising berries to sell, and rabbits for her personal consumption.

The fourth article had a lot of pension factoids:

  • New York is the worst state to retire in, by one survey.  (But no state is that well off.)  Wyoming, South Dakota, Colorado, Utah, and Virginia are supposedly the five best states for retirement.
  • The odds for a woman of being in poverty after age 65 are high.  Part of that is that women live longer.  Also, the private pensions of most women are smaller.  Another part is that joint pensions for the often higher-earning husband drop in amount paid after he dies.  Two *do* live more cheaply than one, so that *is* a loss.
  • Most people think they won’t have as comfortable a retirement as their parents. (Probably true.)

Altogether, many are worried about retirement.  That is a rational fear.  I have older friends who have thought ahead, and retrained for lower-impact occupations.  If you don’t have assets, you will probably end up working.  Best to think about that sooner, rather than later.  After all, many Americans get to age 65 with less than $100,000 saved.  In this low interest rate environment, getting less than $4,000/year from your savings won’t do much to pad old age, but maybe working in a nice place could.

This isn’t the advice that many want to hear, but for 75% of Americans reaching 65, it is realistic.  Be grateful if you get to retire.  Be more grateful if you don’t get bored.