Cuts in pensions, death of spouse could lead to a wobbly three-legged income stool.
Imagine receiving a letter in the mail informing you that your monthly pension benefits were at risk of being cut by 40%. Would you have enough income to keep up with your expenses? What about maintaining the quality of your lifestyle?
Questions like these place the importance of retirement income analysis at the front and center of being prepared for the unexpected. The three-legged stool metaphor of retirement planning, in which Social Security, employer pension and savings work together to provide secure income has evolved over the past few decades. Namely, pensions have been replaced for a growing number of workers by defined contribution plans, shifting the burden from employer to employee.
But pensions do still make up part of the three-legged stool for a portion of American workers and state employees. And this is why, if you fall in that category, you may need a plan to keep your stool from getting wobbly. If you, instead, have a 401(k)-style plan, please keep reading because you too want to be prepared for the unexpected.
Today, more than 1.3 million working and retired Americans nationwide are in danger of losing a portion or nearly all of their pension benefits. Workers in industries including mining, retail trade, construction, transportation and other sectors who are part of approximately 130 multiemployer pension plans face these prospects because plan sponsors’ contributions haven’t been adequate enough to finance the benefits promised.
The imminent crisis, and one Congress is attempting to address, is a $54 billion deficit in the federal agency program that insures multiemployer defined benefit plans. This insurance, provided by the Pension Benefit Guaranty Corporation, exists as a backstop for workers if their employers aren’t able to fulfill their pension promises, whether that’s because they’ve gone out of business, or for other reasons.
While $54 billion is a big number, consider that estimates suggest that multiemployer plans themselves are less than 50% funded relative to their current liabilities, and that there is $600 billion of underfunding in multiemployer pensions nationwide. Big numbers like these can sometimes be difficult to grasp, as is quantifying the stress people may experience from receiving mail informing them of a potential 40% reduction in their benefits.
The Personal Costs of Pension Cuts
Someone who was so informed was Butch Lewis, a Vietnam veteran who returned home and worked for 40 years as a trucker and Teamster. Mr. Lewis had been retired for only one year when he got a letter that his earned pension benefits were at risk of being cut from $3,349 a month to $1,999 – the 40% cut we’ve been referring to.
Mr. Lewis, the retired head of his local Teamster’s organization in Evendale, Ohio, fought to preserve his fellow Teamsters’ pensions. He passed away on New Year’s Eve in 2015 at the age of 64 of a stroke. Doctors attributed his stroke, in part, to the stress from fighting the proposed pension cuts.
In late July, the House of Representatives approved the Rehabilitation for Multiemployer Pensions Act, also known as the Butch Lewis Act. It would provide low-interest 30-year loans to troubled pension plans. The Senate has yet to take up the legislation.
Meanwhile, the funding gap of state pensions is estimated to be more than $1 trillion, though there is a widespread disparity between that of well-funded state public pension systems and those that are fiscally strained.
These are the estimated figures, but how do they impact us? How do we place what happened to Mr. Lewis in a broader context? Simply put, we think it shines the light on the importance of retirement income analysis and peace of mind. This means being prepared for the unexpected like a financial loss, and, more importantly, that you don’t run out of income and outlive your money.
We believe it’s also important that this planning includes conversations between spouses and their financial advisor about what could happen after the wife or husband passes away. We realize the death of a loved one would be a significant emotional event, but would the surviving spouse be okay financially?
This isn’t just a yes or no question. Coming up with the answer requires analysis. How much Social Security income coming into the household will be lost now that there is only one benefit (whichever was higher) rather than two? If there was a pension, is it survivable? Will the surviving spouse get the same amount, some, or none at all?
By now, we hope you’re getting the picture that a wobbly three-legged stool for retirement income can become stable with some planning. And for that, you don’t have to make the repairs (if they’re needed) on your own. We specialize in providing those near or in retirement with safe and secure income plans.
Let us know how we can help!