Even though the stock market is at an all-time high and bonds are at a 30-year high, many pension plans are dramatically underfunded. So, what do you predict will happen to these pension plans if stocks and bonds inevitably experience a decline? That’s right, dangerously low shortfalls.
The average pension fund has only 77% of the assets they need to meet their legal liabilities. When pension plans become insolvent, they are taken over by the federal Pension Benefit Guaranty Corporation (PBGC), similar to FDIC insurance for bank accounts. Unfortunately, the PBGC is already running deficits and, by its own estimate, there is a 91% chance they’ll be insolvent by 2032.
The city of Detroit is cutting the pension benefits of city employees by 26% as part of its recent bankruptcy. There are public pension plans already reducing future cost-of-living adjustments that are necessary for pension recipients to keep up with inflation. These pension cuts can occur to anyone relying on a pension plan that is underfunded or in peril of becoming insolvent. The state of Alabama is predicting their pension fund will go broke and New Jersey just cut $2.5 billion to its pension payment to fill in the state budget deficit.
On a related topic, U.S. interest rates are still near record lows and yet, government deficits are still unusually high. If interest rates on government debts return back up to normal levels, then deficits will be markedly higher. This will also put pressure on reducing pension benefits for government employees; let alone social security.
In every financial area of your life there is one important lesson: you are on your own. You need to act as if you’ll get half your pension, half your social security, etc., and create your own retirement plan that is under your control. Anything money-related that you leave for others to manage creates an additional risk of not meeting your financial needs.