If you are planning to retire in comfort, you must make different plans from those your friends and peers are making. That’s because the conventional pension fund programs are in trouble.
This article by John Rubino spells it out.
First, only the rich will be able to enjoy a comfortable retirement. Americans are part of this rich sector of the world. They know this.
One of the things that separate the “rich” world from the rest of humanity is the expectation that a lifetime of work is rewarded with a comfortable retirement. Whether through an employer’s pension or 401(K), or government plans like Social Security and Medicare, citizens of the US, Canada, Europe and Japan take it for granted that some baseline income and healthcare benefit is out there waiting for us when we need it. And we plan our saving and investing accordingly, presumably putting away less than we would if our retirement had to be completely self-funded.
So imagine our surprise when it turns out that pension plans, from company-specific to federal, don’t have nearly enough money to keep their promises.
He then quotes from a Wall Street Journal article.
Retirement trust funds created to cover billions of dollars in medical costs for unionized workers and their families are running short, forcing the funds to cut costs, trim benefits, and ask retirees and companies to pony up more cash.
The biggest such fund—a trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependents—is underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month.
The funds, known as VEBAs, or voluntary employee beneficiary associations, are being hit by rising medical costs and poor investment performance. Their funding comes in part from company stock, rather than just cash payments, making them vulnerable to the market’s volatility.
This means that millions of retired workers will find that the money runs out before their time runs out. Meanwhile, workers will have to pay more into the funds.
Does this sound like a formula for a comfortable retirement? You bet it doesn’t.
Rubino asks: “How exactly does a pension plan get underfunded by $20 billion? Don’t people notice when the underfunding hits, say, $20 million? And isn’t someone obligated — on pain of jail time — to adjust the cash flows to bring them back into balance? It seems like a number this big would take a long time to accrue, which means a lot of people over a lot of years have to violate their fiduciary if not legal duties.” Correct. But nothing has been done. Nothing will be done. So, the practice will continue.
Here is what happened.
Clearly there was a scam being run, and the mechanism was the projected rate of return. As stocks, real estate and bonds all soared during the credit bubble decades, pension funds got addicted to 10% annual returns and didn’t seem to recognize that those returns would have to revert to mean eventually. As a result they didn’t adjust their expectations downward. So now that stocks have literally returned zero for an entire decade and bonds by definition can’t earn more than a few percent a year, these pension funds are stuck with widening gaps between what they owe and what they’ll have down the road. And they’re surprised!
I hope you, unlike the pension fund managers, are not surprised. You must take great pains to examine the details of your pension fund’s performance since 2000. You must also begin to re-think your plans for retirement. Here’s why.
Meanwhile, Social Security and Medicare are in even worse shape, with unfunded liabilities totaling somewhere north of $50 trillion. Their cutbacks will dwarf those of the above private plans.
The message to First World beneficiaries: Don’t expect any plan, government or private, to carry you in comfort through 30 years of retirement. Like most of the rest of humanity, you’re on your own.