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A Pension Hole the Size of Japan’s Economy (Part 2)

       In last week’s post I wrote about the growing public pension crisis in our country. A recent Wall Street Journal article highlighted the efforts by different states to try to start solving the problem which will only grow worse in coming years.

       Some pension recipients have either agreed to cuts to try to avoid deeper reductions forced upon them while other recipients have had their benefits involuntarily reduced. Some states’ efforts have been struck down in the courts so far. The numbers, however, are staggering and more attempts will surely come. So, who will be affected and is there anything you can do now?

       Most retirees in their 80’s and 90’s are not likely to be affected by any changes. First of all, many of the oldest pension recipients will pass away before changes are implemented. Secondly, lawmakers will try to inflict as little pain as possible on their constituents. The oldest retirees have no ability to make up for the loss of income. Having counted on their pension income for years, it would be impossible for them to replace it. Many would also be facing significant long term care and health care costs. A loss of income would be catastrophic at that point.

       It is likely that younger public workers who have not yet retired would face changes. They would be best able to adjust. The younger the worker and more time till retirement he or she has, the better off he or she will be. At one time pensions were viewed as a certainty – like death and taxes. It doesn’t look like that may be the case much longer. Younger workers ought to start thinking about ways to replace pension income thru 401ks and IRAs.

       The shift in the private sector from defined benefit pensions to defined contribution pensions (ie. 401ks) was viewed as bad for the average American. That’s because with a 401k your guarantee of money in retirement lasts only as long as there is a balance in your account. That is a function of how much you and your employer added to your account and how wise you were in investing it. But it is now apparent that the “guarantee” of a traditional defined benefit pension – income for life – was unrealistic. The government has made promises it now realizes it can’t keep. It turns out that maybe we are all better off taking more control of our retirement plans thru 401ks and IRAs.

       And what about the third group – the younger retirees in their 60’s and 70’s? Changes to pension plans for current workers won’t be enough by itself to solve the problem. Cuts in pension benefits would most negatively affect this category of retirees. What can they do? For one thing, they can make lifestyle choices factoring in income that is less than what they currently receive. That way if a cut does come they can better absorb it if they are, for example, only spending 65% or 75% of their current pension income. Another option, if possible, is to delay retirement a little longer or take a part time job to try to increase that nest egg.