Is Your Pension About To Collapse?
You can’t ignore the reality: government pensions, union-supported pensions, and private pensions are all woefully underfunded.
Workers have been overpromised for generations and while our parents may be enjoying their pensions (for now), the pressure on the entire structure is overwhelming the system to the point of collapse.
Ever since around 2008, when the government started dropping interest rates, pensions have not performed. As a result, we have this massive, massive shortfall plus we have toxic assets, fake assets being pumped into them by Wall Street. And then there’s looting and incompetence.
Even if you don’t have a pension or a 401(k) plan, you are about to have your financial life severely disrupted by forces outside of your control.
And second, regardless of whether you’re a Baby Boomer who is about to retire or a Millennial just starting out in life, this systemic crisis will affect you.
What Is A Pension Plan?
To better define a pension plan, you first need to know the differences between the two types of retirement plans.
First, there is a Defined Benefits (DB) plan.
DB’s include pensions as the primary component. DB’s were considered to be one leg of the Three-Legged Stool of Retirement Planning philosophy. The post-World War II generation used the Three-Legged Stool metaphor to represent the defined benefit plan, along with traditional savings and Social Security. When combined, all three “legs” would provide a comfortable retirement for almost everyone.
However, a few things challenged the strength of that plan.
First, President Nixon took the U.S. (and therefore the world) off the gold standard in 1971. As I go into great detail in my books Rich Dad’s Prophecy, and more recently, FAKE: Fake Money, Fake Teachers, Fake Assets: How Lies Are Making the Poor and Middle-Class Poorer, before President Nixon closed the gold window, the dollar was backed by gold.
Nixon did this because the U.S. was increasing its trade deficits with other countries. In other words, we were importing more than we were exporting.
When a currency like the dollar, yen, or peso is not tied to real money like gold or silver, governments are able to print more and more money out of thin air. This leads to the devaluing of the purchasing power of that currency.
The second event that weakened the Three-Legged Stool philosophy was the slow migration from DB plans into the second type of retirement plan: the Defined Contribution (DC) plan like 401(k) plans in the United States, the Super in Australia, and the RRSP in Canada.
In 1974, the Employment Retirement Income Security Act (ERISA) was passed in the United States that set minimum requirements for private companies to provide retirement and health plans for their employees. This led companies to change from a pension plan (which guaranteed money to its employees) into Defined Contribution plans instead.
My co-author of Who Stole My Pension, Ted Siedle, says, “In the decades to come, we will witness hundreds of millions of elders globally, including the Baby Boomers in America, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many of our oldest. Global population demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of the world’s elderly population is inevitable.”
How Did It Get So Bad?
Mismanagement, greed, vote-buying, unrealistic investment return projections, excessive fees, poorly estimated longevity tables, you name it. A lot of factors have gotten us to this miserable place, but there is still time.
The problem is that too many people don’t want to open their eyes.
They don’t want to see or believe that everything they’ve worked for over the past several decades or more (all their adult life) could very well go up in proverbial smoke.
No one wants to admit when their financial world is crumbling around them. I’ve seen it over and over through the years: a spouse keeping their true financial situation hidden from their wife or husband and then when they lose the house and everything else, that other spouse is stunned.
They don’t want to admit they failed.
When it comes to this pension problem, people just don’t want to believe everything they were promised could very well amount to empty words.
They don’t want to believe they’ll have to work well beyond their planned retirement years.
Unions have been notorious for pressuring companies and governments to promise amazing pension benefits. Civil servants end up piling on the overtime to max out their retirement benefits. Private companies decided to chase after mergers and acquisitions when they should have been paying into the pension fund.
Let’s not forget low-interest rates for the past decade that have put a huge strain on the future stability of the pension crisis.
The only thing preventing the storm from hitting now has been a rising stock market. We’re now going on an 11-year bull market. This party won’t last forever. And when that bubble bursts, the train will rocket off the track.
But the pension crisis isn’t limited to government-sponsored Defined Benefit programs.
A recent survey of pensioners in the United States revealed they are generally unaware as to whether their pension is underfunded or not as well as the risks any such underfunding poses to them.
You need to know whether your pension is adequately funded to pay the money it’s promised you.
An “underfunded” pension plan is a retirement plan that has promised to pay more money than it has.
The more underfunded a pension is the less assurance that future retirees will receive the pensions they were promised or that current retirees will continue to get their previously established benefits.
I recently spoke with Pete Antico, a Hollywood actor and stuntman, who exposed what is happening with the pensions of SAG/AFTRA.
Pete said, “The Hollywood pensions are very interesting because most people in the United States believe that if you’re in Hollywood, or you’re an actor, you automatically make millions of dollars. And our union has about 160,000 members, about half of those members make no money. But what is interesting is that in the biggest bull market in the history of the country,our pension plans funding ratios went down when 1.5 to 2% a year. And I remember when they came in and said, “Oh, we have the Pension Protection Act, it allows you to smooth your liabilities out over 10 years. And I said, ‘Well, how is that?’ with a stroke of a pen, with a law, you’re trying to tell me that automatically gave you more money, to fund your plan with a stroke of a pen?”
Whether a pension plan is underfunded can be as simple as comparing the fair value of plan assets, which includes plan assets that the sponsor estimates it will have in the future, to the accumulated benefit obligation, which includes the current and future amounts owed to pensioners. If the fair value of the plan assets is less than the benefit obligation, there is a pension shortfall.
The Coming Superstorm
The two low-pressure systems here are overpromising and underfunding. The high pressure “steering” mechanisms would be “historically low-interest rates that have driven up pension liabilities around the world” and companies borrowing billions to cover current pension obligations (but all that’s doing is trading one debt for another).
In other words, trying to kick that can down the road isn’t really kicking a can; it’s shoving a snowball that’s just getting bigger down a slope.
It’s fast approaching the wall and when it does, you’ll see millions of people in serious trouble.
But it’s coming and it’s time to wake up. It’s time to get serious. It’s not too late to do something about this tremendous pension problem, but it continues to be the 800-pound gorilla sitting in our living room no one wants to acknowledge or even look at.
Editor, Rich Dad Poor Dad Daily