Is your pension safe?
By Michael E. Chadwick CLU ChFC CFP®
Most people assume that promises made to them by their employers are iron clad. For those of us who are self-employed we have no employer to rely on and must rely on ourselves to make sure our future retirement is secure.
“Pension” is thought of by most people as a defined benefit pension plan that will pay a fixed dollar amount when you retire. Those plans are few and far between today as many businesses and employers try to reduce their expenses. This shift brings “defined contribution” plans such as 401(k) into the limelight.
Many businesses have both a pension plan and a 401(k) type plan. In the past few years many large employers and unions have actually reduced pension plan payments and eliminated insurance benefits that were previously included in pensions. Many pensions have actually gone bankrupt in the past few years.
When pension plans go bankrupt, they are taken over by the PBGC (Pension Benefit Guaranty Corporation.) Just a few years ago the PBGC had a surplus of 5 Billion dollars. Today the PBGC has a deficit of 3 Billion dollars. It is amazing how quickly things can change.
A promise made to you is only as good as the promisor’s future ability to pay. You truly never have any guarantees that your pension plan will come to fruition as promised. All plans are typically “negotiable” as time unfolds and employers try to reduce costs. I expect that in the future more employers, including towns, states and the government will try to eliminate the expenses of defined benefit plans and move towards 401(k) type plans. As this happens, more responsibility is in the hands of each individual to secure a stable retirement.
If you have a plan through your employer or own one personally such as an IRA, SEP, SARSEP or SIMPLE plan, there is nothing to worry about. All of the assets will be there for you and will never be negotiated away. You just need to be sure that the account balance will someday provide you with ample, guaranteed, supervised income to last your lifetime. The nice part about personal plans is that when you are done with them you can pass the balance on to your heirs, something you cannot do with a traditional pension plan. If you have a pension plan you will need to make decisions on survivor payout options, something you should discuss with a professional before you make that decision.