The challenge of managing retirement plans

Pensions and the ability of workers to save enough for retirement are getting some attention from Congress. Currently under debate is a proposal that financial advisers, particularly for pension planning, should be regulated by the federal government.

This issue will surely become very controversial when the powerful lobbies from bankers, investment firms and financial advisers try to prevent interference.

Concurrently, news media and many talk shows have taken on the inadequacy of retirement for the baby boomer generation, born from 1946 to1964.

Various surveys and studies show that the 50-to-60-year old demographic group has not put aside sufficient funds to underwrite a long retirement. Predictions of severe cutbacks in lifestyle as well as having to work beyond the traditional retirement age may be the fate for many boomers.

Since baby boomers reportedly hold 80 percent of the wealth of the nation, they are easy targets for investment schemes, especially high-risk products promoted to increase the retirement portfolio. It’s an obvious market for pressure salesman. Surveys show that 80 percent of travel and 77 percent of prescription drugs are purchased by boomers.

With low-risk investments and interest rates that are nearly zero-rate return, a potential retiree can be tempted to take the higher-risk products offered by investment advisers. Government investigators report that the unregulated financial advisers are in the game for their own benefit and not for their clients.

Even 86 percent of established mutual funds and 88 percent of large-cap fund managers underperformed the S&P 500 stock index in 2014.

Another national issue for retirement relates to the unsustainable cost of pensions for municipal and state employees. Several bankruptcies of local governments were caused by the inability to meet these obligations promised to employees as part of their employment package as well as pressure from labor unions. Most municipalities have emerged from bankruptcy without sufficient relief from ongoing pension obligation.

When cities put their workers’ welfare above taxpayers’ resources, there must be some better justification for generous pensions. They have grown over the years since municipalities had better sources of revenue.

The carryover from earlier days when municipal workers were paid less with generous pensions no longer applies. Salaries for public employees often exceed those in private industry for comparable work.

Nearly all municipalities, including counties and states, have pension-funding deficits nationwide. Here in California we have seen at least five cities enter bankruptcy or have it under consideration. In most cases, the largest creditor is the pension fund for retired employees.

Historic lawsuits over obligations to pay retired employees whether or not the municipality has the resources have been news for several years.

The two most recent California bankruptcies concerning Stockton and San Bernardino reached a new level of the legal obligation for pension costs. An earlier bankruptcy settlement in Vallejo did not avoid the obligation to continue the pension payments that created the bankruptcy in the first place.

According to recent surveys, all three of these municipalities will face the same crisis within four or five years and have to reconsider bankruptcy.

The only solution is to raise taxes or find new sources of revenue for the municipality such as a casino operation. Vallejo and Stockton have a large below-poverty population, which makes it difficult to raise new revenues to support the pension obligations.

Corporate pension plans are adjusting their actuarial calculations to provide longer life expectancy of their employees. It is estimated that retirees are living three years longer than the usual calculations generally used.

Some chilling estimates for underfunding of major corporations’ pension plans are: AT&T at $7.9 billion; IBM at $6 billion; General Motors at $2.2 billion, even after surviving bankruptcy; and Dow Chemical at $3 billion.

A global bill for pensions to be funded by private industry is estimated at $25 trillion by the Bank for International Settlements’ Joint Forum, a global body of insurance, banking and securities regulators.

California, already struggling with budget balancing problems, also faces pension plan underfunding. At the San Diego level, city and county pension plans are estimated to have a combined $3.86 billion of underfunding. If the government actuaries used the Moody’s Investors Service evaluation methods for pensions, the underfunded pensions would be $14.5 billion.

That equates to $20,000 for each San Diego household, according to a column by Dan McSwain of U-T San Diego, “Spin Won’t Stop the Pension Wrecking Ball.”

Under the California state pension plans, the state teachers retirement system got a budget of $200 million toward the long-term obligation of $72 billion in the pension plan. Gov. Jerry Brown is now pushing for major retirement plan terms by having the teachers contribute more and wait longer to be qualified in order to reduce the underfunding.

Even Social Security is predicted to be short of funds by 2033 unless Congress fixes the spread between contributors and collectors, an issue that is political poison.

Whether you expect to retire under a private-sector plan or a union contract or just collect Social Security, managing your retirement years will be a challenge.

Ford is a freelance writer in San Diego. He can be reached at

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