There is an old saying that goes, “What’s good for General Motors is good for the country.” Well, General Motors has been in trouble for a long time.
Why is it in trouble?
The answer in one word is—pensions.
So is it true that what is good for GM is good for America?
Is it time to reduce employees’ pensions, or is it time to keep borrowing more and more money to pay those benefits?
Both GM and the U.S. government are facing this same problem simultaneously.
It’s estimated that there are over 50 million pensioners—in the United States alone. worker pensions all over the world are going bust. By 2030, the year Baby Boomers become “super seniors,” (85+) the global pension systems may collapse—just when Baby Boomers need the money most.
401(k) plans and traditional pension plans are two parts of the traditional three-legged stool of retirement: employer-provided pension, Social Security, and personal retirement savings.
The biggest difference between a 401(k) plan and a traditional pension plan is the distinction between a defined-benefit plan and a defined-contribution plan.
A defined benefit plan, DB, was a retirement plan that defined the benefit or the dollar amount a retired person would receive. For example, if an employee worked for 40 years for a company and retired at 65, a defined benefit might pay that employee, $1,000 a month for as long as he or she lived. If that employee lived to 66, the company actually did well because the company only had to pay the defined benefit for a year. If the ex-employee lived to 105, the company paid the $1,000 a month for 40 years.
In 1974, the U.S. government passed ERISA, The Employee Retirement Income Security Act of 1974. Subsequent changes to ERISA will allow companies to switch to DC, or defined contribution plans. The difference between a DB and a DC plan is found in the difference between the definitions of the words: benefit and contribution. A DB plan defines the benefit. A DC plan defines the contribution. In other words, a worker’s retirement is only as good as the contribution—if there is a contribution.
A worker might retire with nothing because he or she contributed nothing. In addition, if a worker retired with $2 million in their plan and that $2 million was gone by age 85—either through distribution or by mismanagement or a market crash—then at 85, this worker would be out of retirement funds and out of luck.
Simply put, the responsibility, expense, and long-term consequences of retirement will pass from the employer to the employee. Although the difference between the letters DB to DC is small, the long-term consequences are and will continue to be, large.
Rich dad said, “For many people of my generation when we came back from World War II, we no longer had to worry much about saving for retirement. After all, we now had a government pension, Social Security, and many of us had a company pension. So rather than learning about investing and preparing to take care of ourselves after we retired, we as a nation began spending like there was no tomorrow. In many ways, it was a good idea because the economy expanded at a tremendous rate.”
You Are Sitting on a One-Legged Stool
When the 401(k) plan was first introduced, it was never intended to shoulder the entire burden of your retirement. In fact, back in the late 1970s people often talked about the “three-legged stool of retirement.” These three legs were:
- The employer’s pension plan.
- Social Security benefits
- Personal contributions
In a nutshell, this three-legged stool is getting very shaky. Thousands of companies have eliminated their pension plans. Social Security is on very thin ice, and most people who are due to retire in the next 10 to 30 years don’t expect to receive what they were promised from this forced savings program.
Now it looks like the third leg of that stool, the personal contributions to the 401(k) plan, is being forced to take on all of the responsibility for your retirement. The problem is that even in the best of economic conditions your 401(k) plan simply cannot grow enough to give you the amount of money you deserve when you retire. The average retirement account is about $60,000. Not nearly enough if you plan to live 30 years after you retire.
And the problems don’t stop there, because we are NOT in an ideal economic situation. We have been hit head-on by two strong market crashes in recent years. On top of that, the debt level forced upon us by the federal government has put all of us at the cusp of yet another bursting bubble that will push the markets even lower for a longer period of time.
Cause of the Pension Crisis
Pensions are a form of cash flow. The problem is that the federal Pension Benefit Guaranty Corporation(PBGC) shifted most of its $64 billion in assets from bonds to stocks and real estate. This means the geniuses behind the PBGC shifted out of cash flow from bonds, presumably because the income from bonds was perceived as too low, and into stocks and real estate, hoping for larger profits from capital gains. This means many pension plans are now in deep financial trouble.
For example, in the city of Chicago, The pension funds not only haven’t made a profit, but records show they will end up losing a combined $54.2 million for retirement plans, which cover Chicago teachers, police officers, municipal workers, garbage collectors, and bus drivers.
Chicago’s unfunded pension liability was $28 billion in 2017, down from $35.7 billion in the prior year. That liability, along with chronic budget deficits, led to downgrades of the city’s general obligation credit ratings and higher borrowing costs. Chicago tried to lower its pension deficit with budget cuts, benefit reductions, and tax increases.
Now, the third-largest U.S. city is considering a controversial new fix: more debt.
The issues of the pension industry have tended to be swept deep under the carpet. Much the same way that people think about retirement saving—that it can wait for another day. We are now beginning to see how much of a mistake this is.
Additionally, the concept of the pension is ancient history for most people. Most companies do not provide a pension anymore, or have drastically reduced the range of their pension program. Now it is mostly government and labor union employees who can count on a pension. Most people have to figure out some other way to generate cash flow for their retirement.
The pension industry is already in a deep financial crisis and could well be the trigger for another global financial and economic meltdown. This has largely been overlooked.
Pension underfunding is a global problem because of the unprecedented scale of the deficits and the number of economically important countries caught up in the problem. Tackling the problem at a global level is hard because of the significant diversity in countries’ regulatory and political regimes.
Ultimately, the culprits that are looting the pensions of public school teachers, firefighters, police—as well as private-sector workers—are on Wall Street.
Become a Better Investor
Rich dad had warned me as a young child about pensions, social security, 401(k)—all the “benefits” of having a job. He said, “Your generation is the generation that is already picking up the tab for my generation’s “free” lunch. That’s why I suggest you not follow the footsteps of my generation. Don’t expect someone to take care of you because you likely will be let down.”
The idea of taking care of myself rather than depending upon a company or the government was easy to accept. I did not want to be dependent upon anyone or any organization in any way. What was sinking in was that investing had little to do with the investment. Rich dad was not for or against any asset class or assets such as stocks, businesses, bonds, or real estate. What he was adamant about was having me learn to be a better investor. To him, being a better investor was far more important than which asset class I was investing in.
I was beginning to realize that the best investment of all was to learn to become a better investor.
Editor, Rich Dad Poor Dad Daily