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Your Pension Will Cost You Your Retirement

Today many Americans rely on their pensions to survive. Decades ago workers were promised that they could work and maintain a healthy lifestyle during retirement.

Not once did the working class have to worry about what they need to do to retire. Everything was taken care of, and all workers had to do is wait until retirement age.

However, fast forward to today, and it’s becoming increasingly clear that the promises are heading towards a disaster.

What Is A Pension?

As some of you may know, a pension is a form of payment, paid at regular intervals for past services, injury, or other reasons. Pensions are paid a fixed amount of regular intervals, usually monthly, following retirement or disability.

The fixed amount is calculated based on times of service, salary while working, and some other positive multiplier.

Sounds simple right? Well, it gets a little more complicated than that, especially for a public defined pension plan.

What Pensions Promised?

In the past, roughly before the 1960’s, funding a pension was relatively easy. The most straight forward strategy was to buy municipal or treasury bonds at a 3-5% interest rate.

Also back then pensions were viewed as a supplement to one’s retirement. Meaning Americans were not putting their eggs all in one basket. Most Americans had plenty of savings and other investments available for retirement.

However, as time went on, the cost of living began to rise, and Americans stopped saving their money. It wasn’t long befor Americans became entirely dependent more on their pensions for retirement.

Increased promises for pensions became more prominent as more Americans dependent on it for retirement. As time went on, pension funds were no longer able to rely on municipal bonds to cover for the increased costs.

The bond rates were just not high enough for retirement funds to stay solvent; pension funds had to take on riskier investments.

What Went Wrong?

The fault of the ever-increasing pension cost is a result outside of pension funds. The real problem resides in the rate of inflation and increasing life expectancy.

When inflation rises, the cost of living increases as well. Inflation causes pensions to be obsolete unless pensions returns are higher than inflation. Otherwise, why pay into a retirement plan that is decreasing in value?

I ask, would you put money into a bank long for 10-20 years if they were offering you a 2% return, but the rate of inflation was 4%? Of course not, becuase you’ll lose money.

Thus, pension funds had to invest in riskier assets such as stocks or even real estate.

Are Pensioners Living Too Long?

According to the Society of Actuaries, their study found that on average, female teachers were living 90 years while male teachers were living 87.7 years.

Most teachers can retire at the age of 55. That’s roughly 35 years of collecting retirement. In essence, more years collecting retirement than years working.

This isn’t to completely absolve pension funds of any responsibility. The truth is at any point in time; pension funds could have leveled with their pensioners in regards to the real value of their retirement.

However, I wonder from a philosophical point do pension even make sense? To promise someone a paycheck after they retire from their job and are no longer productive to their employer.

The whole point of paying employees is because of the productivity they provide to their employer. Otherwise; why else would the employer pay for the employee services?

Now I can understand if there’s a contract agreement to where a portion of the employee’s check is being taken out for an investment or savings plan.

However, to promise someone a guaranteed pension at the expense of shareholders or taxpayers is where I draw the line.

Furthermore, employers have to pay out these promises even when they’re at the expense of the company or taxpayers. Due to the high cost of pension obligations, many local governments are struggling to provide essential services to their citizens.

The Future of Pensions

Some critics say we’re on the cusp of another recession, a recession that will be greater than 2008. I do believe a recession is coming, and it will undoubtedly be more significant than ‘08.

Even with the stock market near all-time highs, pension funds still struggle to stay fully funded. However, some cities have already defaulted or reduced their pension obligations.

Can you imagine how underfunded they will be once the stock market crashes? It’ll be game over, and people’s retirement will go in flames.

However, I am not sure if I would count on the government(s) to cut them right away. No politician in this country would want the responsibility of cutting pension promises to their employees.

It’s unfortunate, as many of these workers believe they should receive their pension. However; most pension plans are unsustainable and when there’s no money to service the obligation, what can pensioners do? Nothing.

What Should You Do About Your Retirement

The first step to having a pension is to not rely on it. Always prepare for your retirement with a savings. Set money aside and place it into assets that will generate income or wealth.

Of course, having an investment is not 100% risk-free. Furthermore, if you learn economics and how to manage money appropriately, you can minimize your risk and have enough saved for retirement.

Do not, and I repeat DO NOT rely on the government or your employer to take care of your retirement. Their interest does not align with yours.

Complacency is a mistake that most people make when it comes to their retirement. During their working years, the average American doesn’t save enough for retirement because they do not understand inflation.

It’s common for individuals to forget about inflation and how it’s the direct cause of the rising cost of living.

Also, too many Americans rely solely on their pension funds for retirement. Do not do this; pension funds struggle to stay funded and will likely run out become insolvent during the next recession. Instead, be active and save for your retirement.

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