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This article is probably not going to win me any popularity contests. If you don’t like listening to some possible hard facts, I would suggest you quit reading through this now. But, if you are practical individual who would rather be prepared for the worst of while hoping for the best rather than simply anticipating the best; this is the most important article you’ll go through all year.
What’s in this article?
- A very fast background on pensions
- Where the future of your Illinois pension may be heading
- Why there is no way to lose by beginning to save in an outside retirement account in addition to your pension
Very swiftly, here is how pensions work:
Each year workers contribute to the pension it becomes a little bigger and whoever is administrating the pension (in your case, the state of Illinois) also needs to put funds in yearly for the pension to remain healthy. With these combined pension contributions, the accounts should be big enough that the revenue generated on interest is sufficient to take care of the payouts to current retired workers without having to dip into the pension's principal.
So that is simple. Workers pay, the state also gives, and the retired workers get paid. Pensions are the standard in the public arena. They also used to be the standard in the private arena until the last generations, when companies started shifting to 401(k)s.
Why the shift?
I just read a book called Retirement Heist by Ellen Schultz, an investigative journalist for the Wall Street Journal. If you do not have enough reasons to be mad at private enterprise as well as our state and federal governments, go through this book. Much of the book was on the downfall of pensions in the corporate world but that tale has a very direct link to your public pension. It is important for you to know this history.
Many of our nation's big companies had very well funded pensions. Overfunded actually, often having around $1.50 for every $1.00 they were expected to owe to their current and future retirees. But through a line of hidden methods and exploitation of tax loopholes, corporate management (aided by independent financial consulting firms) was able to reap profits and gains from their pension surpluses.
After plundering their employees’ retirement account for many years, the pensions became underfunded. The corporate executives assigned the blame to their aging staff, the retiree "legacy costs", and "spiraling" individual medical costs for employees and retirees. They clearly did not discuss or display the measures they took that transferred huge dollar amounts from their employees/retirees to revenue for their shareholders (and therefore additional bonuses and contract extensions for the executives).
They were willing to give up the benefits and retirements of their staff for fast and fleeting profits. The benefits would have paid their employees for years, but when the new financial year starts all profit and revenue numbers go back to 0.
That is why you no longer see very many individual companies providing pension programs to staff and why the 401(k) has become the standard. I do suggest reviewing the book to see all the ways they were able to take from their employees’ pension; it is truly dreadful.
But allow me to exhibit how these issues are pertinent to you and your pension.
Unfortunately, the very same financial consulting firms that aided the corporations to hide pension cuts also functioned by helping state governments conceal and disguise broadening pension deficits and liabilities. These financial consulting firms gave political leaders the tools to avoid fulfilling their pension payment obligations for years at a time.
This lack in funding allowed the law makers and politicians to generate cash for popular programs without increasing taxes for the general population. By doing this, the state politicians were made out to look like community champions and budget prodigies.
Lastly, just as the corporations finished up plundering their pensions, they began placing the scapegoat tag on their staff and retired workers. We are now seeing some states,(as well as some groups + organizations) putting the same scapegoat label on the public workers and retired public workers. In my home state, Illinois, some highly effective groups are getting a lot of backing and media coverage by placing much of our state’s individual issues on the "greedy" teachers and other public staff.
These groups have discussed the complete outliers who receive big pension payments (who were often, and obviously, politically connected), ignoring the modest pension benefits of the common public teacher or worker.
Of course, the real causes of budget and pension deficits are the self-serving politicians results who approved skipping out on contributions and passed the funding obligations to future generations (and, conveniently for them, future government leaders). They and the financial consulting companies functioned as their accomplices.
There are a few more factors to consider as well:
1) When the market took its big drops in 2008 + 2009, if your state's pension account was not in excellent shape, then it most likely had to sell some of its holdings while they were cheap to pay their current obligation to retirees. This goes against the #1 procedure of investing: Buy Low, Sell High.
2) Furthermore, when this happens the account is becoming smaller rather than greater and places the pension in danger of not being able to create enough revenue to pay the benefits of future years without carrying on down the path of selling off assets.
3) Public pension benefits are calculated according to salary and years of service. It is common that the revenue in the method are the standard of the best X years. When benefits are calculated according to this method, an individual has significant incentive to press up their last few years of pay as much as possible.
For example: A firefighter or police officer might work lots of overtime hours in their last few years. A teacher may take on more extracurricular assignments or responsibilities to boost their last years of pay and generate a substantial boost in benefits for the rest of their lives.
4) Salaries in the last decade have increased more than the stock market which indicates that required payments for the last several years and next few coming years of retirees have grown at a greater rate than pension funds have.
5) In addition to that, large groups of the baby boomer generation are retiring each year. This is further increasing pressure on pension funds.
6) It is also expected that over 3,000,000 of that same baby boomer generation will live to 100 or older. Enhancements in medication will increase how long retirees will be owed far longer than what current pension predictions account for.
7) Finally, pension fund managers may feel (and often actually are) compelled to take higher levels of risk to fulfill the investment return projections of the state.
Near the end of Retirement Heist, Ms. Schultz says "If employers [read: lawmakers for public pensions] continue to control the retirement system and manage it for their own benefit, then within our lifetimes, ‘retirement’ will inevitably revert to what it was in the 1930s and before. Society – and taxpayers – will be paying for services to support the millions of elderly, formerly middle – class Americans."
The takeaway here is you should consider finding an additional way to save for your retirement along with your pension. This is to assure your retirement dollars will both outlive you and be sufficient to cover all of your expenses.
It has become extremely clear that even if you work for the most financially stable company in the world or for the state with the most well funded pension, you cannot 100% rely on that company or that state to provide you with something as important as your retirement. It is on all of us to take care and responsibility to assure we can leave the workplace and enjoy the retirement when we want to and the live the way we want.
I urge you to visit this site to get your copy of a free report titled: The Top 9 Mistakes Illinois Teachers Make With Their Retirement. Hopefully I can provide you with a ton of money saving information in the report to make up for the sobering message of this article.