From Teeka Tiwari, editor, The Palm Beach Letter: It was the letter Jerry Deaton had been fearing.
Deaton, a 69-year-old retired truck driver, was waiting for his pension check from the Teamsters’ Central States Pension Fund. It has 400,000 participants in 37 states.
The news was devastating. Deaton stared at the letter stating his pension would be cut in half.
Said Deaton, “It doesn’t leave you with much options. I’ll be 70 in December. Who’s going to hire a 70-year-old truck driver?”
Pensions’ $7 Trillion Time Bomb
Deaton’s story is a microcosm of America’s impending pension crisis.
While the mainstream media focuses on the looming insolvency of Social Security and Medicare, the pension system is quietly on the verge of collapse.
According to Moody’s, federal, state, and local employee pension plans have a combined $7 trillion in unfunded liabilities.
That’s 40% of U.S. gross domestic product (GDP).
The problem stems from demographics and overoptimistic return assumptions.
Take the Central States Pension Fund, for example…
In 1980, there was one retiree for every four active fund members. By 2014, the ratio was reversed… with four retirees for every active member.
Today, for every $1 the fund brings in… $3.46 goes out. At its current rate, experts estimate the fund will be bankrupt within 10 years.
The failure of plans like the Central States Pension Fund is exposing a dirty little secret about the industry… plans are overestimating their actual values.
Here’s what I mean… Pension plans use something called a “discount rate” to determine the present value of their pension plans. In other words, they discount their liabilities by the expected return on their assets.
So the higher the plan’s expected return, the lower its liabilities… and the less participants have to pay into the plan now. But if the plan’s expected return is lower, then participants will have to pay more into the plan to get the same return.
It works something like this…
Let’s say you started a retirement account and wanted to accrue $100,000 in 30 years… and your expected rate of return was 7.5%. In this case, you’d need to put away $11,400 today to get $100,000 in 30 years.
But let’s say your expected rate of return drops to 4.5%. You would need to invest $26,700 today to get the same $100,000 at the end of 30 years. That’s a 134% payment increase.
And that’s the crisis that pension participants are facing today.
The Central States Pension Fund, like most pensions, uses an optimistic expected return of 7.5%. Thirty years ago, a 7.5% return would be a realistic assumption… but that’s not the case today with interest rates at historic lows.
Key takeaway: Pension funds in America are severely underfunded. And it’s only going to get worse as interest rates stay persistently low.
Saved for Now… But Time is Running Out
Fortunately for Jerry Deaton, the taxpayers intervened on behalf of his pension fund. But this is a temporary fix.
In the 2014 U.S. budget, President Obama signed a bill (known as “CRomnibus”) that allows trustees of multi-employer plans to apply to the Treasury Department to cut benefits for current retirees.
The Central States Pension Fund was the first to apply for a benefit cut under the new law. It proposed cuts of 22% to 70% for some pensioners.
But in a surprising move, the Treasury Department rejected the plan. Said mediator Kenneth Feinberg, “We do not believe that the plan as submitted will reasonably avoid insolvency.”
In other words, the Treasury Department didn’t think the cuts would be enough to save this pension from going bankrupt.
So retirees like Deaton are still collecting their full pension checks… but it may not last for much longer.
[In the past, troubled funds like the Central States Pension Fund would have been able to turn to the Pension Benefit Guaranty Corporation (PBGC).
The PBGC is a federal agency created to insure pension benefits. But the PBGC is itself in financial straits. Its funding deficit soared by 550% in 2015 alone.
That means the implosion of just one pension like the Central States Pension Fund would wipe out the PBGC.]
The Pension Crisis is Just Getting Started
The Central States Pension Fund’s application for relief—and subsequent rejection by the Treasury Department—is a sign of things to come.
And when the Treasury Department does approve a pension cutback, it could open the floodgates for more pension plans to apply for relief.
Until then, we’ll likely see a number of moves by pension plans to stave off the inevitable insolvencies. For example…
Oregon has reduced cost-of-living adjustment (COLA) increases in a bid to reduce overall payments from its state pension plan.
The Illinois Teachers’ Retirement System voted to lower its assumed rate of return on investments from 7.5% to 7%… which means plan participants have to contribute more.
And the city of Jacksonville, Florida, has proposed reducing the final pay participants receive based on their years served. Today, participants receive 60% of their pay after 20 years and 80% after 30 years. The city wants to reduce that to 40% and 75%, respectively.
These are just a few “revisions” pension plans have up their sleeves.
How You Can Protect Yourself From
the Pension Plan Collapse
Unlike the past, you might not be able to count on your pension to secure your golden years.
But there are a few steps you can take today to begin protecting yourself.
Keep a close eye on news about your pension plan. By following the news, you’ll be able to find out if your pension is in trouble.
Start a supplemental savings plan. If you have the means, start saving outside of your pension.
Look for ways to generate income outside of traditional retirement assets.
On Tuesday night, I’ll join PBRG’s team of leading retirement experts to address this threat to your retirement. We’re all going to share our best income-producing ideas for retirees across the country.
We’re calling it the Retirement Rescue Roundtable, and it could help you fill your calendar with monthly, weekly, and daily checks… while staving off what Mark calls “Retirement Hell.”
During this special 90-minute event, you’ll discover exactly how our unique retirement “Plan B” works… why we’re unveiling it right now (the timing is critical)… and how you could use it to turn every $50,000 into $1 million or more during retirement. Register for your free spot today.