It use to be the American Dream: work hard, save money, raise a family, and retire with a comfortable lifestyle supported by a reliable pension. Fast-forward to today and that dream appears to be crumbling for many retirees and soon-to-be retirees.
Private and public pensions (the dinosaurs of today) are quickly becoming extinct because of two factors:
- The lessened liability and risk within employee contribution plans (401(k), 403b, etc.).
- The financial overextension and lack of prudent investment management of many companies and local governments.
So, with mounting bad pension plan bets on Facebook stock, large investment portfolio losses, and a record number of pensioners collecting benefits many are asking, “How safe is my American dream?”
On one hand, you have pension managers across the land profess that they have everything under control, but the facts paint a very different picture. Take federal military and civilian pension plans for example. Our headquarters is located in a military town near the largest Air Force base in the U.S., so many of our clients are retired military and consider their federal pensions the safest around. While they may feel that way, a study completed less than a year ago may prove quite the opposite. Analysis last September by USA Today shows that, “Retirement programs for former federal workers — civilian and military — are growing so fast they now face a multitrillion-dollar shortfall nearly as big as Social Security's,” noting that, ‘[t]he federal government hasn't set aside money or created a revenue source similar to Social Security's payroll tax to help pay for the benefits, so the retirement costs must be paid every year through taxes and borrowing.”
Combine studies like the above with an ever-increasing private pension defaults and local government bankruptcies, and you have a toxic mix that very well may shatter your American Dream. In 2012, American Airlines signaled the largest pension default in history affecting 130,000 employees. Add them to the long list of other busted pension plans such as US Airways, Circuit City, Delphi, Lehman Brothers, and Polaroid and you come to find that there is no such thing as a “too big too fail” pension.
P.B.G.C. to the Rescue?
The only possible saving grace in all of this is the Pension Benefit Guaranty Corporation (PBGC). The government affiliated PBGC is designed to be a backstop if a company defaults on their pension promises. PBGC will cover, up to a limit, of what your employer was paying to you, so you may receive less than what you’re receiving now if you're hit by a default.
While it’s comforting to know that the PBGC is helping to “insure” your pension, there has been a tremendous strain on PBGC resources due to a record number of pension defaults. If and when things get worse, who is going to bail out the PBGC?
In its 2011 annual report, the PBGC notes, “Our obligations (liabilities) continue to exceed the assets currently available to pay them, so we continue to report a very substantial deficit.” The PBGC can and has gone to Congress to request emergency capital injections. So, as more pensions default, the PBGC is on the hook, which ends up requiring Congressional action to replenish the coffers, who gets stuck with the bill? You, me, and every other tax payer, through higher taxes and eventually inflation because of the ever-expanding money supply.
What You Can Learn From Skydiving
The hope is that your pension, be it private or public, will continue to pay you (in some capacity) every month for the rest of your life…right? But, what if it doesn’t? What’s your backup plan?
I have yet to skydive (it’s on my list), but I do know that when you jump out of an airplane you always pack two parachutes. An extra parachute just in case the first one doesn’t deploy as planned. No one plans to have his or her pension seized by the PBGC, but if it happens do you have an extra parachute to produce retirement income?
In the age of disappearing pensions and empty promises isn’t it obvious that you need to set aside part of your retirement savings into a “personal pension plan?” Resolve to implement a strategy that can provide you with a steady income stream regardless of market volatility.
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.