Boomers Beware : Pensions The Next To Go?
Pensions come in two broad categories: defined benefit pensions and defined contribution pensions. A defined benefit pension promises a specific monthly stipend for a retiree’s lifetime, calculated using the number of years worked and some measure of the worker’s earnings over that time. A de fined contribution pension sets up personal investment accounts; typically, the employee can make some choices about how the money in his account is invested.
A large part of the difference between union plans and employer plans appears to be a tendency towards low contributions among union plans. In 2005, the latest full year of data available, collectively bargained pension plans were more poorly funded than their non-union counterparts. Large plans, those with 100 or more participants, strongly showed this pattern. While 36.5 percent of nonunion plans were fully funded,1 only 19 percent of union plans met this criterion. The Pension Protection Act of 2006 considers funds underfunded, but not “at-risk,” if they are at least 80 percent fund ed.
While nearly 90 percent of non-union plans met the funding threshold of 80 percent, only about 60 percent of union plans were not “at-risk.” Among collectively bargained pensions, around 11 percent were only 65 percent funded, low enough to put the larger national plans in the heavily-penalized “critical” category. Only two percent of non-union plans were in this condition.
Among small plans, similar patterns emerged. Of non-union plans, 57 percent were fully funded as com pared to 28 percent of union plans. While 43 percent of non-fully funded non-union plans failed to pay their annual costs, 71 percent of union plans that were not fully funded were behind on payments. However, as compared to large union plans, small union plans were 37 percent more likely to be less than 80 percent funded, and 16 percent more likely to be in “critical” condition.
Our analysis finds that pension plans for the officers and staffs of unions were much better funded than those for the rank-and-file. On average, the 21 largest union pension plans had less than 70 percent of the funds that they would need to cover their total obligations, and none were fully funded. Seven were less than 65 percent funded. Yet 23 officer and staff funds from the same unions had 88.2 percent of the funding they would need to pay promised pensions, including seven fully funded plans and another 13 with at least 80 percent of their required funds. Excluding the seven plans strictly for union office employees, staff funds had 98.4 percent of their required funds.
Unions have also been caught using their funds to achieve their political ends. In 2005, the Department of Labor wrote the AFL-CIO a letter telling it to reconsider such practices. Theoretically, pension funds are not permitted to make investment decisions based on politics or public policy. Using pensions as a political tool hurts union members because it may push their retirement funds into lower yielding investments. That diminishes investment returns and thus reduces resources available to pay promised benefits.
We all know the impending doom of the Social Security program. According to AARP :
Social Security must be put on a sound financial footing, and soon. We need to strengthen the system to achieve long-term solvency while also guaranteeing a benefit that can’t be outlived, with adequate cost-of-living adjustments that maintain the value of the benefit. Social Security has been, and must continue to be, the bedrock of retirement security, especially as defined benefit plans dwindle.
Second, we must encourage employers to continue to support existing defined benefit plans in ways that treat both newer and longer-service workers fairly. Congress is working to reconcile House and Senate pension reform bills that would shore up such plans. The key is to strike the right balance by tightening contribution rules enough to ensure that companies set aside adequate funds to keep pension promises, but not enough to impel healthy companies to drop their coverage.
Finally, employers, government and individuals must take a hard look at how well the 401(k) system is working. Only about half our work force has access to such plans today, but more plans are coming. Simple changes in their design—such as automatically enrolling workers but leaving them the option to drop out, or automatically investing workers in age-appropriate “lifestyle” funds—can dramatically increase retirement savings. And employees should have easy-to-use savings options, clear information and independent, appropriate advice to help them make decisions.
If you are in your mid 40s or older, this issue should be front and center in your mind. If you are 55 or older, you must have a plan A,B,C in mind. Please use these resource links to obtain needed information to make sound decisions for your future. That would include demanding from our politicians dedicated solid plans going forward.
Those on the left who say if we want limited government, we should give up our social security benefits are idiots. That is our money. We PAID that money. Those of us who own businesses have paid it double. To suggest we don’t deserve our money back, with interest at least, are pulling the old liberal methodology.. Free speech, but only if your a liberal; Liberty is for liberals only; and now Social Security is only for those who believe in big government and the nanny state.
I don’t think so.
On that note- don’t forget to join us on the picket lines Thursday! Nearly every area is having a Tax Day Protest. See you on the front lines, fellow boomers. 🙂