Your pension could be at the center of America's next financial crisis

[Chuckanut]

I've given this some thought. In fact about a year ago I ran Firecalc with my SS reduced to 70% of the current estimate, and my pension reduced to 80% of the current amount (80% being the lowest I have ever seen it funded).

I should do fine, but will have to skip jet setting to Paris for dinner at one of these places:

Expensive Restaurants in Paris | Fodor's Travel

IMHO, pensions seem like education - there are people on both sides who have a vested interest in convincing us that it's all going to Heck. Our kids can't read, write and do math, and our pensions will be broke in a decade or so, if they already aren't. Usually there is some power acquisition agenda behind these people.

 

[Chuckanut]

The current [-]war on savers[/-] low interest rate environment might be an indicator of what would happen if pensions were reduced or eliminated.

 

[samclem]

Folks who are presently at low-risk because they have a multi-legged stool (SS, pension, investments) will find themselves at considerably higher risk if the legs of the stool are found to be well-correlated or interdependent. I think that's what we are talking about here. Quite a nasty surprise if the crash of our (and many other people's) pension results in a simultaneous crash of the investments we were counting on as a backup.

 

[rodi]

I know I am nervous here in California. My sister is retiring at the end of the school year (a few months before she turns 60). They have imposed some "fixes" on the CalPERS and CalSTRS pension systems... but the problems are still there. She's definitely counting on her pension. She has other assets... but would have to make some significant changes to her lifestyle if her pension were to go away.

More likely she'd get a less sweet deal on healthcare... She's going to get a cadillac plan for her and BIL for less than I'm paying for a HDHP (anti-cadillac)... I can see them inching the price up. But medicare will help there... BIL is only 2 years away and she's only 5.5 years away from medicare.

 

[Walt34]

I sleep well, our pension is 94% funded last time I looked a few months ago. The County where I worked does a lot of things I disagree with but financial irresponsibility is not one of them.

But as others correctly point out that is no guarantee that we would be unaffected by large numbers of other pension system failures. So yeah, it's something I pay attention to but I'm not too concerned about it. Yet.

 

[MichaelB]

This is a really interesting topic, but WADR, but would help the discussion if it were framed a little differently. There are many ways pension obligations can fail. System-wide failure is highly unlikely. This is more like junk bonds, some will fall and most will pay, so the question is, what would I do if I had a pension that began to fail.

For someone with a retirement benefit that includes an annuity, cola, and health benefits, failure might follow this sequence

1. First freeze the health benefit, all future health cost increases pass entirely on the employee
2. Then eliminate the health benefit
3. Then eliminate the cola
4. Then reduce the annuity amount.

If I feared this might happen to me, I would take financial measures to fund the above components in that order.

Edit to add - I think describing which pensions fail, why, and how, would lead to a discussion that is more specific and actionable.

 

[ikubak]

My state pension is 68% funded and the updates they send us are always optimistic with a few jabs at those who question how well funded we are. My personal opinion is 68% funded is nothing to brag about or any reason to be smug. If it were a private pension, I would be more worried but since it's a state pension I figure they can always tax me and my neighbors statewide to shore it up. DW's pension is private and was well funded last time I checked.

I recommend everyone review annual financial statements for their pensions if they are available.

 

[MooreBonds]

The thread IS to ask IF there are widespread pension failures, how will we ALL be impacted? Or is the issue overblown, e.g. not widespread?

I know the topic of SS has been discussed frequently on the forum....but SS is the "pension system" that I would worry about far more than a few states (not that I'm not worried about a few states causing havoc in the markets/economy/government - I am - but SS is a much heavier gorilla in the room). A vast majority of people depend on SS as a significant part of their retirement stool. Given the funding status, it WILL require something to be done. With each passing year that passes w/o a solution, the solution that will have to be done will create pain that will be more acute, and more widespread.

So I would say non-SS pensions are an issue to worry about - but SS is the first thing we must address and fix, and is a bigger worry, since it will likely effect every taxpayer in some fashion throughout the country.

 

[Midpack]

^^^ Good point. I assume Soc Sec will suffer incrementally worst case, SOME articles have stated 30% haircut is the worst case right or wrong.

I was imagining other private and public pensions might fail more suddenly (and some more drastically than Soc Sec), and IF so how would that affect those of us without any pension through taxes, investment losses, recession or worse, etc.? But again, I'm starting to think pensions in the aggregate (POV for those without pensions) will suffer incrementally worst case as well. How much is anyone's guess.

Like most here, we've built a substantial safety factor into our plans.

 

[ERD50]

... - but SS is the first thing we must address and fix, and is a bigger worry, since it will likely effect every taxpayer in some fashion throughout the country.

But wouldn't any 'fixes' have the same overall result? How can we 'fix' it - increase taxes, cut benefits, some combination? The money to fix it comes out of the economy, so it's a wash pretty much, I think? Not in terms of individuals, but just overall impact on the economy.

Same with any other pensions, seems like the die is cast. The problem was the unsustainable promises, and that train has left the station.

Earlier, someone said " our (IMHO) disgraceful retreat from pension benefits over the past generation" . I guess I would say I don't feel the retreat is disgraceful at all, I'm glad it has happened. It was the making of promises that may not be able to be kept that was the disgrace. I'd rather be in control than to have a promise.

-ERD50

 

[Clone]

To clarify the chain of events that would cause me to hunker down with the pile of wheat and shot gun shells-

If the market were to implode, than it would implode the funding of the pension funds at dear old magacorp. It it were truly severe, that would also mean that my investments went down with the ship at the same time. Haircut Social Security in a severe manner, plus crank up inflation to devalue any other savings or fixed annuity type resources, and it could get sketchy.

But before it becomes a big problem for me, there will be masses of people that will be completely sunk, and we will see social unrest, increase in crime (even for mere survival), and the 'have-nots' will be looking to loot the 'haves'. That would be a greater concern.

Well, that and the kids moving back into the house...

 

[NW-Bound]

Don't we think the government, at the federal and state levels, already know all about this? And the many pension managers? They are the ones keeping the money, let's not forget. There are thousands of people involved, all working on this. They know things we laymen don't.

Relax. It will all work out.

 

[daylatedollarshort]

We have a few pensions that are around ~90% funded and are under PBGC, so they would all have to go to from 90% to zero and then the PBGC not pay out for us to have a big impact. Even then they aren't the bulk of our retirement income. We'd miss the pension income but we could absorb the lost income in our current retirement plan or reduce expenses by downsizing.

 

[Dash man]

Those pensions well funded may not be if the financial markets crash or are frozen by government action.

 

[Greencheese]

Aren't we already seeing the reaction to the issue now with the migration of people? Situations such as working in a city but living in a neighboring county/state to avoid the high taxes which are used to shore up ailing government pensions/budgets.

As mentioned earlier I think you're going to see more weight being put on government debt loads in the future for where people move and live. Nobody wants to be left holding the bag when the music stops, for Detroit it was bond holders but what happens when its homeowners? If a street is the dividing line for a city and 1 side of the street increases taxes by 50% compared to another, how will that affect development in the future? I could see places like Wisconsin that have fully funded government obligations being winners if a state declares bankruptcy and the results turn nasty for people living there.

Never underestimate the movement of people, the south wasn't a real option for many people until air conditioning was prevalent, maybe something like energy efficient self heating roads/sidewalks can create an environment where the awful northern winters are a thing of the past and the population moves back north. If crushing debts make a place too expensive to live, then other attractive areas are bound to pop up and people will flock there either for the cool factor or in the future to escape excessive pension taxes.

 

[copyright1997reloaded]

I haven't seen the obvious 'answer' yet in this thread. "When in doubt, inflate." (AKA QE, monetary actions, purchase of non-treasury assets by the Federal Reserve, etc.)

This is especially true given the natural inclination when assets may not be repaid (due to default) is to not loan, i.e. when people start worrying about return of capital vs. return on capital. [That is, increasing defaults is deflationary.]

So, the obvious answer to me in terms of what 'they' will do is to pay those promised benefits using dollars that are created out of thin air. Since inflation will be the result, 'they' will also need to remove inflation protection for most of the animals on our farm (maybe some of the special animals will still keep their inflation protected promises).

 

[Running_Man]

I haven't seen the obvious 'answer' yet in this thread. "When in doubt, inflate." (AKA QE, monetary actions, purchase of non-treasury assets by the Federal Reserve, etc.)

This is especially true given the natural inclination when assets may not be repaid (due to default) is to not loan, i.e. when people start worrying about return of capital vs. return on capital. [That is, increasing defaults is deflationary.]

So, the obvious answer to me in terms of what 'they' will do is to pay those promised benefits using dollars that are created out of thin air. Since inflation will be the result, 'they' will also need to remove inflation protection for most of the animals on our farm (maybe some of the special animals will still keep their inflation protected promises).

We have had QE for 9 years now please explain why there is no inflation.

 

[samclem]

I haven't seen the obvious 'answer' yet in this thread. "When in doubt, inflate." (AKA QE, monetary actions, purchase of non-treasury assets by the Federal Reserve, etc.)

That's definitely what we see around the world and throughout history.

Since inflation will be the result, 'they' will also need to remove inflation protection for most of the animals on our farm (maybe some of the special animals will still keep their inflation protected promises).

Similarly, indexing of tax brackets and standard deduction to inflation may be eliminated or (more likely) restricted/capped.

Of course, once this happens, investors normally demand a lot more interest for debts denominated in the "expected to be inflated still more" currency, and a bad cycle develops wherein it can be difficult to raise capital for businesses, etc.

An ugly silver lining: If this becomes the situation in many countries, the US might still come out in >relatively< good shape if US dollars and US government securities are seen as "less bad" than others. People have to put their money somewhere/into something.

 

[Dash man]

I haven't seen the obvious 'answer' yet in this thread. "When in doubt, inflate." (AKA QE, monetary actions, purchase of non-treasury assets by the Federal Reserve, etc.)

This is especially true given the natural inclination when assets may not be repaid (due to default) is to not loan, i.e. when people start worrying about return of capital vs. return on capital. [That is, increasing defaults is deflationary.]

So, the obvious answer to me in terms of what 'they' will do is to pay those promised benefits using dollars that are created out of thin air. Since inflation will be the result, 'they' will also need to remove inflation protection for most of the animals on our farm (maybe some of the special animals will still keep their inflation protected promises).

Inflation got us out of the massive debt of WWII, but global deflation is the culprit today.

 

[youbet]

Inflation got us out of the massive debt of WWII, but global deflation is the culprit today.

Even more so, inflation got us out of the huge Viet Nam debt. The same inflation caused the biggest threat to FIRE portfolio survivability that ever existed, a bigger threat than even the Great Depression.

 

[NW-Bound]

...So, the obvious answer to me in terms of what 'they' will do is to pay those promised benefits using dollars that are created out of thin air. Since inflation will be the result, 'they' will also need to remove inflation protection for most of the animals on our farm (maybe some of the special animals will still keep their inflation protected promises).

Please do not say "special animals", as all animals are equal.

Orwell called them the "more equal animals".

 

[Taxman59]

I see a few smaller funds collapsing due to a bad year of returns. Those funds will put pressure on the PBGC which will in turn raise rates on other pensions which are underfunded. That will cause more funds to collapse (and the market will get more unstable as investors either are withdrawing more to make up for lost pensions, or are trying to figure out the winners and losers inthe pension collapse. At this point, Illinois or Calpers will have signs of collapse, and the tax burdens of California and Illinois will increase dramatically. This will lead to more flight from taxes, causing the Feds to step in. This is when the effect on the entire population will be most likely. Fed taxes will rise, "entitlements" will increase, inflation will rear its very ugly head, and the 30's will return. The only way out of it is a major global war to ramp up the economic war engine, and reduce the population. At this point the best currency you could have will be food and ammo! (just kidding).

How will this affect me? I have no pension, so the collapse of the markets is when I will be hit, and I have 3 sons who are in their 20s who would likely be cannon fodder in any war.

 

[cooch96]

Only one million pensioners in risk of default? I actually feel relieved by this news, I'd have thought the number 20x this. So how many are likely to end up with nothing but SS, vs getting paid 60% or something? 50k? That's a bummer for sure, but I'm not sure it'll be enough to trip a global recession.

 

[Blue Collar Guy]

i have a story about this

my brother in law, a real knock around blue collar truck driver nyc guy, pension was after 30 years about 3400 a month, it was one of those multi union type deals so long story short, he gets about 700 bucks a month now he collected 3400 for about 2 years then they lowered it to 1800 for 4 years and this year he gets the great news that 700 bucks is now he number. so as he is in his late 50's he gets a trucking company warehouse supervisor job, calls it 5 1/2 days a week(but works mon-fri and about 7 hours on saturday) makes about 85k , thats before taxes, oh i forgot the 700 pension so add that to it, thats what happened to his multi union trucking pension, he was crushed when he got the news,

 

[Walt34]

Yeah, I'd be crushed too! Scary.