Is Your Pension In Trouble?
Recent troubles by various pension funds, along with the recent Automakers bailout (which was largely fueled by pension obligations) have shined a bright spotlight on pensions and the economic viability of such. Being that pensions are still a staple of many workers’ retirement plans, the question of whether they can fulfill the promises that were made is an important one.
Sadly, the answer to that question is “probably not”.
To give some background, pensions used to be a common benefit given by employers (especially post WW2 until the 1980’s), and many Baby Boomers and workers in their 50’s are counting on their pensions to help fund their retirement. But almost daily, you hear about pensions being reduced, and the corresponding (and justified) anger of those affected.
Pensions seemed like a good idea at the time – a company offers a retirement income as a way to attract and retain workers. The workers give years of service (and for many, a lifetime), and the company takes care of them with steady, predictable retirement income. However, three factors worked against this being viable:
- Pensions were seen/promised as “guaranteed” income, and a key part of an employee’s compensation. The employee need not think about it - he or she simply gets “xyz” a month at retirement, usually based on years of service or as a percentage of their top income years.
- However, in reality, pension funds are little more than investment vehicles. Little thought was given to market volatility. In essence, it’s almost impossible to “predict” future income based on growth, much less “guarantee” it. See how the last downturn affected your 401k and stock account? Well, it’s not like pension funds were magically shielded.
- People are living longer as a whole. More and more people reach their 80’s and beyond. When pensions were “promised” the assumption was retirement at 65, with less than ten years of payout on average.
So faced with the above, companies have two choices: cut pension payments, or go under. That’s prettymuch it. And while cutting payments isn’t popular, the people most affected by it aren’t working anymore, making it the lesser of two poor choices. This doesn’t make it right or wrong, or justify it. Retirees will say “you promised” and grumble about the CEO’s compensation, but if the dollars aren’t there, the dollars aren’t there.
There’s no tidy wrap up, blame, finger pointing, or lesson learned here. The simple truth is this: if you are counting on a pension, you need to be aware that the amount you are counting on may not be there.