Justin’s note: If you or a loved one has a pension, please read today’s guest essay very closely.
It comes from our colleague Teeka Tiwari, editor of The Palm Beach Letter. As you’ll see, the pension crisis is quickly unfolding… and there are certain steps you should be taking today to prepare…
By Teeka Tiwari, editor, The Palm Beach Letter
It was the letter Jerry Deaton had been fearing.
Deaton, a 69-year-old retired truck driver, was waiting for his pension check from Teamsters’ Central States Pension Fund. It has 400,000 participants in 37 states.
The news was devastating. Deaton stared at the letter stating his pension would be cut in half.
Said Deaton, “It doesn’t leave you with much options. I’ll be 70 in December. Who’s going to hire a 70-year-old truck driver?”
Deaton’s story is a microcosm of America’s impending pension crisis.
While the mainstream media focuses on the looming insolvency of Social Security and Medicare, the pension system is quietly on the verge of collapse.
According to Moody’s, federal, state, and local employee pension plans have a combined $7 trillion in unfunded liabilities.
That’s 40% of U.S. gross domestic product (GDP).
In a moment, I’ll share three steps you should take to check the status of your pension plan. But first, I want to tell you what’s causing this crisis…
Pension Plans’ Dirty Little Secret
The failure of plans like the Central States Pension Fund is exposing a dirty little secret about the industry.
Let me explain…
Pension plans use something called a “discount rate” to determine their present value. In other words, they discount their liabilities by the expected return on their assets.
So the higher the plan’s expected return, the lower its liabilities… and the less participants have to pay into the plan now. But if the plan’s expected return is lower, then participants will have to pay more into the plan to get the same return.
It works something like this…
Let’s say you started a retirement account and wanted to accrue $100,000 in 30 years… and your expected rate of return was 7.5%. In this case, you’d need to put away $11,400 today to get $100,000 in 30 years.
But let’s say your expected rate of return drops to 4.5%. You would need to invest $26,700 today to get the same $100,000 at the end of 30 years. That’s a 134% payment increase.
And that’s the crisis that pension participants are facing today.
The Central States Pension Fund, like most pensions, uses an optimistic expected return of 7.5%. Thirty years ago, a 7.5% return would be a realistic assumption… but that’s not the case today with interest rates at historic lows.
Another problem pension plans face is an aging population.
In 1980, the Central States Pension Fund had one retiree for every four active fund members. By 2014, the ratio was reversed… with four retirees for every active member.
Today, for every $1 the fund brings in… $3.46 goes out. At its current rate, experts estimate the fund will be bankrupt within 10 years.
Pension funds in America are severely underfunded. And it’s only going to get worse as interest rates stay persistently low and the population ages.
Time Is Running Out
Unlike the past, you might not be able to count on your pension to secure your golden years.
But there are a few steps you can take today to begin protecting yourself:
Keep a close eye on news about your pension plan. By following the news, you’ll be able to find out if your pension is in trouble.
Start a supplemental savings plan. If you have the means, start saving outside of your pension.
Look for ways to generate income outside of traditional retirement assets.
Let the Game Come to You!
Teeka “Big T” Tiwari
Editor, The Palm Beach Letter
P.S. My colleague, Tom Dyson, has just written a new book that your banker is praying you’ll never read…
It’s called The 702(j) Retirement Plan: How to Fund Your Own Worry-Free, 100% Tax-Free Retirement. And it details the findings from a 12-month investigation into former President Ronald Reagan’s secret alternative “retirement income plan”—a strategy that’s unconnected to the government, yet may pay you almost two times more than Social Security. But unlike Social Security, it will never run out of money…
This book is not available on Amazon. You can’t buy it on eBay. And you’ll never see it in bookstores. However, Tom has agreed to send a free preview copy to anyone with a U.S. mailing address who would like to read it. You can learn how to get your copy right here.