Today, let’s pretend that I’m Morpheus asking you (Neo) if you want to take the blue pill or the red pill. Non-movie readers, this is a Matrix reference so please hang with me for a moment.
The blue pill represents that all is well in the world of pensions. It enables knowledge that your pension is safe and will cover most/all of your retirement expenses.
Stop reading if you take the blue pill – this is your final warning.
The red pill represents reality and the realization that pensions are in a treacherous condition – most are in trouble. You understand that pensions are dinosaurs and companies are looking for ways to escape their financial responsibilities of these plans.
Taking The Red Pill Is Saving My Retirement
The blue pill keeps you oblivious and unobservant to your future financial wellbeing. You don’t feel the need to have a back-up plan, you aren’t saving much, and you don’t despise debt.
Thankfully, I took my red pill when I was 49 years old and had a net worth of $155,000. At the time, I was spending money like the pension (though 90% funded at the time) was always going to be there. My savings was minimal and my debt was ridiculously high.
I was “hoping” everything would be alright. And I was banking that the Pension Benefit Guaranty Corporation (PBGC) would bail my pension out if it failed. This is not my normal behavior and it surprises me as I look back.
And this behavior of “hope” would tease me into making risky stock purchases. I was also taking on debt to maintain a lifestyle and not saving to my full potential. In a nut shell, the Matrix kept be oblivious to the dangers and potential realities of retirement.
Reality Can Be Scary
Now granted, not all pensions are equal. There are many different kinds (i.e. single and multi-employer) and many performance levels of corporate funding. Some are in great shape (today) and 100% or more fully funded. But most are not in good condition and I’m assuming most reading this are in that category.
As someone with a pension, I try to keep up on news and happenings within the pension world. Googling “pensions” confirms the sad state on a topic that should be joyous. Here are only a sampling of headlines I saw today (these come straight from Google search):
- Whistle-blower Ted Siedle sees pensions as hotbed of fraud
- With a growing $100k pension club, California’s pension problem only gets worse
- The time bomb inside public pension plans
- Mineworkers call on congress to protect failing pensions
- Many pensions still struggling after the great recession
- Proposed pension changes alarm BIW workers
- Why imminent pension crisis reveals grim future for all retirees
- State pension guardians asleep at the wheel – Angry pensioners
Remember, you voluntarily took the red pill – you asked for this. All I’m doing is trying to wake you up that your pension might not be your golden goose. I want you to take control of your own destiny and not let “hope” be you only plan for retirement.
Pension Benefit Guaranty Corporation (PBGC)
A wake-up call on pensions wouldn’t be complete without more detail on the PBGC. I used to think this was our pension savior, again, until I took the red pill. The PBGC is a U.S. federally chartered corporation that is supposed to guarantee pensions up to a certain amount.
I’ll use the words of the U.S. Government Accountability Office (GAO) to best understand the condition of the PBGC. Here’s the link to the study for more detail but I’ll use some direct quotes too. (Please read the study)
The financial stability of the Pension Benefit Guaranty Corporation’s (PBGC) single- and multi-employer programs faces many structural challenges that require congressional action.
Let’s see, we’re already waiting for congressional action on Social Security, Healthcare, etc… and now we need their action on the PBGC? Don’t hold your breath. Remember, you took the red pill.
While PBGC faces a long-term challenge with its single-employer program, it faces an immediate and critical challenge with its multiemployer program. PBGC’s projections suggest that the insolvency of the multiemployer program remains highly likely within the next 6 years.
If you are in a multi-employer pension plan, please take two red pills. These plans started with good intentions but they are structured in a way that now provides little incentive for financially strong companies to make contributions.
It Only Get’s Worse With The PBGC
PBGC’s financial future remains uncertain, due in part to a long-term decline in the number of traditional defined benefit plans and the collective financial risk of the many underfunded pension plans PBGC insures. We designated the single-employer program as high risk in 2003 and the multiemployer program in 2009.
According to past PBGC projections, it is nearly certain that the multiemployer program does not have the needed resources to satisfy the agency’s long-term obligations.
I can add very little to the GOA report on the sad condition of the PBGC. Be your own guarantee and don’t let your pension or the PBGC control your ability to retire.
I don’t like to write articles like this (too often) because it’s more of a gut punch than anything. But please now you are better off for reading this if you have a pension, little savings, and some debt. Tough love is the best I can describe it. Hopefully, you’ll love me later when you retire.
Are You Energized Now?
Having access to a pension can be a real blessing. Having access to a pension in trouble and doing nothing to take control of your retirement future is a nightmare.
All I’m trying to do is wake people up to the current condition of pensions. Once you are aware, then you can take action to protect yourself. Here are a few things you can do:
- Determine the health of your current pension plan (read their annual report)
- Determine if your plan is at risk of freezing (read past article) their entire program
- Increase your savings rate to minimize the impact if your pension where to not fully payout
- If you can’t make up the gap, then you’ll have to cut expenses and work longer
Bottom line is that you need a back-up plan … so create one that fits your situation. It could include downsizing, moving to a cheaper state, or figuring out a way to increase preretirement income.
I truly hope that none of us have to deal with a defaulting pension plan. But we have to be prepared for any contingency before and during retirement.
Thanks for reading!
Mr. TLR