David Lerner Associates --How Safe Is Your Pension Plan?
Earlier this summer, the city of Detroit was in the financial headlines for all the wrong reasons. On July 18, Detroit officially filed for bankruptcy, becoming the largest municipal bankruptcy filing in U.S. history by debt, which is estimated to be between $18-20 billion.
The practical result of this bankruptcy filing for city workers and retirees is that their pensions could be reduced, perhaps drastically. Detroit’s total unfunded pension liabilities are approximately $3.5 billion.
“What If” Scenario Planning
In the wake of Detroit’s bankruptcy filing, some public and private sector workers and retirees in other cities are wondering about the security of their pensions. On the private sector side, for example, the Teamsters’ Central States, Southeast & Southwest Pension Plan, the nation’s largest multiemployer pension fund, has liabilities ($34.9 billion) that are almost double its assets of $17.8 billion, according to a recent BenefitsPro report.
Some financial and retirement experts are recommending that workers and retirees who are dependent on pension plans do some “what-if” scenario planning to gauge how well prepared they might be for a possible cut in their pension benefits. How much of a cut? It depends on how at risk you believe your pension might be.
One city in Rhode Island that declared bankruptcy in 2011 cut one out of every three of its retirees’ pension payments by more than half. So a worst-case what-if scenario might involve projecting what you would do if your anticipated pension payments were reduced by 50 percent. Would you be able to get by on this, or would you need to supplement this with additional retirement income from a separate retirement plan, like an IRA or employer-provided 401(k)?
If you are relying on a public or private pension plan to provide most or all of your retirement income, you might benefit by doing this kind of what-if planning sooner, rather than later. This could potentially give you more time to start saving money on your own— separate from your pension plan. If your pension benefits are not reduced, you may then have additional money set aside for retirement, which could possibly enable you to retire sooner or enjoy a more comfortable retirement lifestyle.
Do Some Digging
Another step recommended by some experts is to find out to what degree your pension plan is funded. Some cities’ and states’ pension plans remain well funded, while others are not. Meanwhile, the gap between how much money states have promised to pay their employees in pension benefits and how much they have actually set aside to pay these benefits totaled more than $1.3 trillion in fiscal 2010, according to the Pew Center for the States’ analysis of pension and retiree health-care funding.
In addition, states collectively have actually set aside only five percent of the money that will be needed to pay future retirees’ health care and other non-pension benefits, according to the Pew analysis.
Employees who participate in private and union pension plans are permitted by law to access their plan’s funding notice to find out to what degree their plan is funded. Participants in plans covered by the Pension Benefit Guarantee Corporation (PBGC) that are less than 80 percent funded are required by law to receive a notice of the funding level. Most public pension plans (at the state and local level), however, are not covered by the PBGC.
While large municipal bankruptcies like Detroit generate the headlines, it’s important to note that the pension benefits of most state and local government retired employees are relatively safe. The combined assets of all state and local government pension funds exceeded $3.5 trillion at the end of the first quarter of 2013 — this was more than 15 times the amount of money paid out by these funds annually in benefits.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC
Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com Visit our Facebook page
Connect With Us