I love my pension! I’ve earned a promise to pay at retirement in exchange for 22 years of faithful service. The hope is to put in another 5 years before I call-in that marker. My pension is private and currently fully funded (most aren’t so lucky).
I keep an eye on my company pension and overall pension trends. I strongly recommend that others do the same too. And because most won’t, I felt like writing something in the hope I can reach a single reader. Pensions aren’t discussed in-depth much on this blog but I recommend reading what has been written.
WARNING: This article isn’t a good news story so brace yourself!
A Brief History
In 1875, American Express established the first private pension plan in the United States. They did it with the purpose of creating a stable, career-oriented workforce. About 25 years later, there were 13 private pension plans. By the 1960’s, over half the private sector workforce had a pension.
Things were way different in early-1900’s. For example, 75% of all males over age 65 were working. If they weren’t working, they were probably disabled. But here’s the issue, life expectancy was about 50 years (versus 78 today).
Let that digest for a moment. Most people didn’t live to see a pension. And if they did then they wouldn’t live long to see decades of payouts (like we might today). It was just a completely different game of life back then. Pensions sounded like a great deal but people worked hard and didn’t see much of the payoff.
In 1935, Social Security was born. Pensions plus social security were the best of times. Add in retirement savings and retirees had the three-legged stool of retirement financial security. Then people started living longer … oops!
Things Don’t Look Good Today
Private, public, multi-employer … they are all in trouble. Today, only 12% of private industry workers participate in a pension plan. Of those 12%, many/most of the plans are in trouble and I’d bet most people don’t even know it.
About 75% of state/local government workers are still in their plans too. These folks think because they’re in a government job that their pension is safe. But little do they know that nobody is really safe and the pensions are in trouble regardless of the type.
What do the government and business leaders say about pensions? Here are just a few and their comments make it clear, pensions aren’t good economics:
- Chris Christie (then New Jersey’s Governor) – “I can guarantee you this, the pension and benefit reforms that come to my desk will be signed.”
- Andrew Cuomo (New York Governor) – “I respect the state workers and their unions, but we simply can’t afford to pay benefits and pensions that are out of line with economic reality.”
- Kevin Cox (GE Chief HR Officer in October 2019) – “Returning GE to a position of strength has required us to make several difficult decisions, and today’s decision to freeze the pension is no exception.”
- Rep. Richard Neal, D-Mass., chairman of the House Ways and Means Committee – “Now more than ever, we urgently need to stabilize multiemployer plans before they become insolvent ….”
Governments and businesses just don’t have the financial power anymore to continue funding the pensions. Honestly, I’m expecting my company to freeze it’s pension in 2021. I just don’t know how they can continue and the writing is on the wall. Interest rates are so low, economic times are rough (thanks COVID-19), and people are living longer.
Governments can’t continue to raise taxes to fund their underfunded pensions. Citizens just won’t tolerate it anymore. You can only tax the public so much before they say “no more.”
And companies, especially those trading on the exchanges, have investor activists, investors, analysts, and others screaming to stop funding pensions. Underfunded company pensions are facing pressure because the billions of dollars in liabilities are stacking up each year. As of today, 25 companies have pension obligations that owe more than $1 trillion.
Pictures Tell The Story
Sometimes, pictures need to paint the simple outline of just how things look. I Googled some pension charts and chose those that spoke to me. They basically say, danger ahead and be wary of counting on your pension.
Just these 4 pictures show:
- State pension funding is in bad shape and will only be worse after COVID-19
- Multi-Employee pensions are a complete disaster
- Many public pension plans are underfunded and likely doomed
- Chicago (chosen at random) has more beneficiaries than current workers. Many cities have significant funding issues.
The Next Step is Obvious
Until I had my own financial awakening, I felt good knowing my pension was there. In fact, I used it as a crutch and still do. But at least I’ve got 22 years into the pension now so I’m lucky.
I should’ve been saving long ago but didn’t and my pension is bailing me out. Sure, I’ll have over $1 million in my investment portfolio but my pension is worth at least $1.2-$1.5 million.
If you have a pension, pretend like it’s not there. That’s the best advice I can give you, especially if you have less than 10 years in the pension and are under 45. I predict that private company pensions will freeze and many state/local pensions will cut benefits within the next 10-20 years.
Increasing your savings rate is the single best thing you can do. If you are between 20-35 years old, a savings rate of about 25% will probably get the job done.
If you are between 36-50, you should probably increase it even more to about 30-35%. And at 50 years and over you should be cranking it up as much as possible … let’s say around 40%+. And the last few years before retirement should see a saving rate over 50%.
Summary
The bottom line is to forget you have a pension and save like crazy. If any kind of pension is there for you someday then count your blessings and take it. That’s exactly what I’m doing. Count my blessings for the $65,000-$70,000 pension while I save as much as possible in these last 5 years.
Fear is a great motivator. That’s what I’m hoping you feel with this article. The fear that the pension you think you’ll have or hope to have might not exist. Honestly, I don’t think they survive so you’ll need another plan.
The beauty of the pension is the income floor it provides in retirement. This income floor has a tremendous impact on your safe withdrawal rate. A 5% retirement withdrawal rate might only need to be 2% if you have a pension. And if you keep expenses low and your pension is high enough then you might not even need to pull from savings.
The only people that want pensions are the beneficiaries (us) of them. It seems like everyone else is trying to take them away. Understand the financials of your pension. Be one of the few at your workplace to know the wellbeing of the most significant component of your retirement. Own your financial destiny by increasing your savings rate. It’s the #1 thing you can do.
Thanks for reading!
Mr. TLR