What Should You Do If Your Pension Is On Shaky Ground?

Published: April 27, 2020 | 2:53 PM ET

By: Ivory Johnson, CFP, ChFC, Founder, Delancey Wealth Management, LLC

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Americans have been told for years that retirement income sits on a three-legged stool supported by social security, personal savings and pensions. The dearth of savings and the social security deficit has been well chronicled, although a likely pension crisis that will force many retirees to recalibrate their quality of life in the very near future has been hiding in plain sight.

The notion that a private entity or public enterprise could replenish most of a worker’s highest earnings was always optimistic. After all, a 5 percent distribution from a diversified portfolio stands a 35 percent chance of running out of money within 30 years due to volatility in the market. Yet still, many retired workers are banking on a 100 percent chance that their employer would replace a portion of their income for the rest of their lives.

Lo and behold, many defined benefit plans will begin their descent into insolvency as early as three years from now, beginning with multiemployer pension plans that six million U.S. retirees and four million U.S. workers rely on for retirement income.

Please note that multiemployer pension plans are maintained under collective-bargaining agreements between a union and several different employers and include miners and the transportation industry. It’s been reported that the United Mine Workers Association pension will be insolvent in 2022 followed by Central States in 2025. These two entities alone pay benefits for 500,000 participants. Just as concerning is that the burden of unhealthy firms would seal the fate for currently healthy pension plans saddled with the obligations of their colleagues.

It’s worth mentioning that the Pension Benefit Guarantee Corporation insures these benefits, but they too will be insolvent by 2025 by their own admission, suffering a $100 billion shortfall. Should the safety net for failed pensions prove unable to serve its purpose, hundreds of thousands of retirees would see their pensions reduced or eliminated altogether. The impact is far reaching, as 2016 pension payments from multiemployer plans collectively supported nearly 543,000 American jobs that paid nearly $28 billion in labor income, $89 billion in total economic output nationwide, $50 billion in GDP, and $14.7 billion in federal, state, and local tax revenue.

State pensions are in a bit of hot water too. Illinois recently asked for $40 billion to bailout their pension and Sen. Mitch McConnel was having none of it, recommending they go bankrupt. Keep in mind that state revenues are down 25% and expenses are rising. Moreover, a state bankruptcy, which is different from a default, goes through (conservative) federal courts where a judge determines which debts will be paid and will likely protect the municipal bond holders, leaving pension obligations on the chopping block.

So what should retirees do?

The first step is finding out the health of your pension plan by contacting the Labor Department’s Employee Benefits Security Administration hotline at (866) 444-3272. You can also schedule counseling with the American Academy of Actuaries Pension Assistance list to check their plan’s calculations at www.pensionrights.org/counseling-projects.

Those covered by a traditional defined pension plan receive a pension funding notice every year which gives workers an idea of how well funded the plan is due to the Pension Protection Act of 2006. Should the document be unavailable, the plan’s Form 5500 would give you a rough estimate of the plan’s financial health.

To the extent that your pension is at risk, acknowledge that the loss goes beyond the scope of dollars and cents – these benefits were promised to you, they were negotiated, and sacrifices were made in exchange for a brighter retirement. Until you deal with the emotional pain, it will be difficult to address the financial impact that gives you the space you’ll need to find a solution which may unfortunately include generating revenue from another source or reducing your retirement lifestyle.

One would hope that Congress puts a cape on to offer bailouts and reforms that preserve promises made over generations, but even the most hopeful among us know that superheroes have not walked the halls of Capitol Hill in quite some time. Multiemployer pension plan participants would be wise to know where they stand, and if it turns out to be on shaky ground, plan accordingly. The resources are available to identify potential plan shortfalls; finding the strength to begin that process is the first step to preserving a healthy retirement.

Ivory Johnson, CFP®, ChFC
Delancey Wealth Management, LLC
20 F Street, NW, Ste. 750
Washington, DC  20001
(202) 507-6340

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