How Will You Retire If Social Security & Your Pension Go Broke?
“The Social Security trustees’ latest report moves up the system’s insolvency date by four years, to 2037. Medicare’s hospital fund runs out of money in 2017, two years sooner than expected.” St. Louis Dispatch (May 12, 2009)
The alarming announcement was recently made that Social Security will begin paying out more money than it takes in within the next three to five years. Since Social Security is a ‘pay as you go’ system (otherwise known to the rest of us as a Ponzi Scheme), this means that the foundation of our country’s retirement system is beginning to crumble. Once this tipping point is reached, the government will have to use reserve funds to make up what will be a growing shortfall each year going forward. What reserve funds? There are none. In fact, the myth of some sort of ‘Social Security Trust Account’ is nothing more than that, a myth. The only asset backing up the payments owed to future recipients is a government IOU. As a result, the government will have to decrease benefits or increase the retirement age (likely both). Social Security has already started the process by announcing no cost of living adjustment (COLA) for recipients for at least the next two years. This is the first time in 25 years that a COLA has not been made. Not only is Social Security on the path to insolvency, but Medicare is close behind.
From the Los Angeles Times (Oct 9, 2009) “We no longer have the luxury of time. The Social Security trust funds have shrunk dramatically because of the recession. Already, those trust funds were misleading; in order to repay them when the money is needed to pay retirees, the government would have to raise taxes, cut government spending or borrow -- the same policy options that would have been necessary if the trust funds had not existed in the first place. In its use by lawmakers as an accounting technique and a mechanism to fund government spending, the trust funds have been a failure. Now on top of that, the funds have less money to provide the rest of the government with dollars to borrow. The bottom line is that we should have been making changes to Social Security years ago once we knew there was a problem; there is no excuse for further delay.”
From The Orlando Examiner (Sept 28, 2009) “The federal government maintains that there is no cause for alarm even though the Congressional Budget Office says that the system will begin running permanent deficits by 2016, and will be totally depleted by 2036.”
The second dark cloud on the horizon are the nation’s private pension funds. Pension funds pay a specific monthly benefit during retirement based on the number of years of service of an employee. The benefit is based on projections of the growth of the underlying investments in the pension fund. Unlike the federal government, private businesses and other government agencies actually fund their pension accounts. This means that real money is added to the fund each year on behalf of the future recipients. The problem is that most pension funds have been devastated by the poor performance of the investment markets over that last several years. It is now becoming public that pension fund managers are taking inappropriate risks in an attempt to make up for recent losses. As a pension fund recipient, it is likely that you will see lower benefits than have been promised to you. This will either be the result of the inability of your pension fund to recover from historical losses, or losses incurred from taking too much risk with what funds remain. Of course, organic losses from investments do not even take into account the billions lost by pension funds invested with scam artists such as Bernard Madoff. It also does not take factor in the real possibility of billions in losses from money invested with insolvent insurance companies that are being kept alive with government bailout money. Other abuses such as bribes in exchange for managing pension money are being investigated by New York State.
From the Washington Times (Oct 11, 2009) “The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees. Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade. After losing about $1 trillion in the markets, state and local governments are facing a devil's choice: Either slash retirement benefits or pursue high-return investments that come with high risk.”
The Pension Benefit Guaranty Corporation (PBGC)
The PBGC is to pensions what the FDIC is to banks. Take a look at this recent news story outlining how the PBGC stepped in to save a Texas pension fund. Here is what was shocking for me to read from their own website, “As of September 30, 2008, the end of the 2008 fiscal year, PBGC reported a $10.7 billion deficit in the financial statements for its single-employer pension insurance program.” In order to clarify this and to be sure I was not over-reacting, I contacted PBGC. I was able to confirm in an on-the-record interview with their spokesperson, Gary Pastorius, that there is no misunderstanding. Based on current obligations to pension recipients, the organization is $10 billion in the red, and this does not take into account any future pension funds that may fail. When asked about AIG and how their failure would affect America’s pensions funds and the PBGC, Mr. Pastorius offered a polite, “No comment.” You can read into that what you will, but I have to say that of any story I have researched this year, learning the financial state of the PBGC has been most concerning. What’s more, why is this issue getting so little coverage in the media? If the nation’s pension funds are going broke and the PBGC is insolvent, that is big news. Why are alarm bells not going off? This year the PBGC has already taken over nearly 100 failed pension plans, up from 74 last year. Based on unaudited financial statments and our review of testimony by the PBGC before Congress, Christian Money.com is projecting that the PBGC will be facing a shortfall of between $30 and $40 billion when it releases financial statements in the next 30 days.
How can I find out if my pension plan is insured by PBGC?
The easiest way is to ask your employer or plan administrator for a copy of the “Summary Plan Description,” or SPD. The SPD will state whether your plan is covered by the PBGC program. Although PBGC insures most defined benefit plans, some are not covered. For example, plans offered by “professional service employers” (such as doctors and lawyers) with fewer than 26 employees, by church groups, or by federal, state or local governments usually are not insured.
What Can You Do?
Unlike your personal 401K or IRA account, you really have no say in how the money in your pension plan is invested. As a participant in the plan, you should be receiving an annual financial statement. The problem is that you may need an accountant or financial adviser to assist you in interpreting it. Nonetheless, it is worth getting your hands on to get some understanding of the financial condition of your fund.
My best advice to those that are age fifty or younger is to make no future plans that you will receive anything from Social Security. I would also discount any projected pension benefit you are anticipating by 30 to 50 percent. Better to make your plans now when you still have a reasonable amount of time to do something about your situation. Many people are starting part time businesses, trying to save more, and doing everything possible to get out of debt. In my mind, the collapse of the nation’s retirement security is not a question of if, but when.
$133 Million In Unclaimed Funds At PBGC
Perhaps you or a relative may be owed money from a pension that you lost track of. Do a free search.
Helping you make the most of God’s money!
James L. Paris
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