Pension Check

Carrie Schwab-Pomerantz and Terry Savage
Mon, 15 Dec 2014 21:00:00 -0800
Lifestyle

Are you expecting a monthly pension check during retirement? If so, better check again. Whether your check is coming from a corporation, a union — or even a state or municipality — some new rules passed by Congress as part of the Omnibus spending bill may lead to cuts in your promised retirement benefits.

The first to feel the pain will be those covered by multi-employer pension plans — typically unions that cover workers in a single industry. Their cuts could start immediately.

It's no secret that many pensions are "underfunded" — having promised more future benefits than the current investments can provide. Even with the stock market at all-time highs, some of those promises are in jeopardy since the appropriate contributions were not made in time to create the growth needed to pay the pensions.
Updated: Tue Dec 16, 2014

Are you expecting a monthly pension check during retirement? If so, better check again. Whether your check is coming from a corporation, a union — or even a state or municipality — some new rules passed by Congress as part of the Omnibus spending bill may lead to cuts in your promised retirement benefits.

The first to feel the pain will be those covered by multi-employer pension plans — typically unions that cover workers in a single industry. Their cuts could start immediately.

It's no secret that many pensions are "underfunded" — having promised more future benefits than the current investments can provide. Even with the stock market at all-time highs, some of those promises are in jeopardy since the appropriate contributions were not made in time to create the growth needed to pay the pensions.

Maybe it's time for you to look into the future security of your own pension — and start saving more just in case it can't keep up with its promises. Every pension plan must give participants an annual written notice about the funding status of the plan.

The amount of today's pension jeopardy depends on the employer: private, multi-employer, union or public/government. And in each case, your retirement security depends on how those pension trustees acted on your behalf over the years.

(Future generations will rely more on 401(k)-type plans, where the payout is dependent on their own investment contributions and decisions.)

Pensions and the PBGC

If you work for a corporation that has promised you a pension, you have an extra degree of retirement income security — sort of. Company pensions (and multi-employer union pensions) are protected by the PBGC — the Pension Benefit Guaranty Corporation. It insures about 26,000 pension plans, covering about 44 million American workers in "defined benefit" pension plans — plans that promise a specific benefit at retirement, perhaps adjusted for inflation in future years.

About 10 million of those insured employees work for "multi-employer" plans in various industries, such as construction, trucking or coal mining. The amount of their benefits is typically negotiated by unions representing the workers. This multi-employer coverage was designed many years ago to allow workers to move more easily between jobs at different companies, without losing pension benefits. A big issue for these plans is that now these plans have an average ratio of two retirees for every worker.

(The PBGC does not insure government retirement plans or military or religious association pension plans, nor does it insure 401(k) plans and other defined "contribution" plans.)

So if your employer files for bankruptcy, the PBGC (a government-owned corporation under the Department of Labor), becomes the trustee and stands behind your promised pension — up to a point. If you were a highly paid worker expecting a big monthly retirement check, you may be out of luck.

In 2014, the top monthly payout from the PBGC is $4,943.18 per month ($59,318.16 per year) for workers who begin receiving payments from PBGC at age 65. And the PBGC payments do not come with a cost-of-living increase, nor do they cover promised retiree health benefits or life insurance benefits.

Even worse, the PBGC itself is in doubtful financial shape, with a deficit of $62 billion according to their latest annual report. And it has warned that its multi-employer program has a 90 percent chance of running out of money within 10 years — especially if some large covered plans fail in the next few years, as projected. (The Central States Teamsters plan has five retirees for every worker!)

The New Deal for Pensions

That's why employers and union representatives got together to help pass the new pension provisions that are part of the Omnibus spending bill, and the law of the land when it is signed by the president.

Under these new rules, promised benefits can actually be cut if a plan is in jeopardy of failure within 15 years and is less than 80 percent funded. (Retirees age 80 years old and older would be protected from cuts.) This is a huge change from long-standing federal rules that prohibit scaling back pension benefits.

These new Federal rules apply only to multi-employer pension funds, but this landmark legislation may point the way to a solution for hugely underfunded state and municipal pension problems. It is estimated that public employee pension funds (cities and states) have total deficits exceeding $1 trillion — and an average funding level of only 72 percent. (That masks huge deficits such as in Illinois where the funding level is only 39 percent!)

Under state laws, currently being challenged in court, those promised benefits cannot be cut now or in the future. Some municipalities facing dire situations have recently come to terms with future retirees for a cut in benefits and COLA's, including Detroit.) But, until now, there's been an impasse in most state and municipal pension issues, with little incentive for municipal workers and their employers to sit down and negotiate any changes.

The state/municipal pension crisis is upon us. The only alternatives in the future will be cutbacks in services or payment defaults or huge tax increases. And since most workers reside in the communities that will be affected, the benefits they do receive will likely be offset by those higher taxes.

Perhaps now, with the new Federal law actually encouraging cuts in benefits for those in multi-employer plans, there will be precedent for altering state and municipal pension promises. That issue will soon be vigorously debated in the courts. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m.newscast and can be reached at www.terrysavage.com. She is the author of the new book "The New Savage Number: How Much Money Do You Really Need to Retire?" Terry answers readers' personal finance questions on her blog atwww.TerrySavage.com. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.