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The Truth About The Pension Crisis – Elisabeth Dawson – Medium

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Photo by Jason Leung on Unsplash

When you think of retirement, you probably have some anxiety about maintaining your lifestyle and keeping as much money as possible. This anxiety was once eased somewhat by the pervasiveness of pension plans, retirement funds set up by employers that retirees draw from in periodic payments.

However, radically shifting demographics as well as corporate mismanagement in the last few years have begun to cause a pension crisis. Companies simply aren’t offering as many anymore, leaving many people planning for retirement, or on the cusp of leaving the workforce, unsure of their financial futures. But why?

Companies have mismanaged their resources and underfunded pension plans, meaning the money simply doesn’t exist to pay out benefits. And for those workers depending on public pension funds, they have reason to worry as well. There’s a stark gap between pension obligations and the actual amount that has been set aside to pay. And that difference is growing every year.

So how did we get here?

The history of pensions.

Pensions have been a prominent feature of employee life for over a century. In 1875, American Express Company was the first corporate entity to establish a pension in the United States. It was offered to employees who had been with the corporation for twenty years, were over the age of 60, and were approved for retirement by a committee. In the 1940s, labor unions became interested in pensions, and by the 1950s a quarter of the American private sector work force had a pension. By the 1960s, that number rose to half.

These guaranteed pensions became known as defined benefits plan, and they allowed employees to rely on a specific amount during their retirement. And private savings accounts, contributed to by the employee of their own accord, were merely supplemental to pensions and government-subsidized accounts such as Social Security.

However, in the 1980s, a shift began to occur from defined benefits plans to defined contribution plans, such as 401(k)s. A 2009 report conducted by the Social Security Administration found that this long-term trend, which still continues today, would create “more losers than winners” and family incomes would decrease on average.

This lead us into the current crisis, which is affecting retirees nation-wide and causing a panic amongst those who fear they won’t have enough to live on when they leave the work force. In fact, 71% of Americans say they don’t have enough saved to retire… It’s no wonder the pension crisis has people scared.

The pension crisis today.

So what exactly does it mean when someone talks about the “pension crisis?” Well, the pension crisis is the predicted inability or difficulty of corporate and government entities in paying for pensions. Simply put, public pension funds don’t have the means to pay for the benefits workers were promised. And the problem is getting worse.

It’s been brought on by years of financial mismanagement, the 2008 market crash, and shifting demographics. Think about the workforce today compared to fifty years ago — It looks completely different. Young people are job-hopping without fear. A CareerBuilder survey showed that 25% of young employees would have five jobs by the age of 35. Now, think about the original pension plan, a reward for an employee’s decades of company loyalty. It’s hard to get companies to shell out pensions if that same job consistency no longer exists.

This isn’t to say changing jobs is a bad thing, or you have to remain in a job you dislike until you retire in order to be financially secure. It’s simply noting why companies are doling out pensions less frequently… Well, one of the reasons.

The 2008 crash forced city and state pension funds and tax revenues to take a huge hit, but the amount they owed retirees never changed. And the number of retirees has risen since then. By trying to keep up with what they owe, and the influx of retirees, cities and states were forced to use money that could have gone to other funding such as school programs, the police force, and more. Yet not every retiree is seeing the benefits of this change — In Oregon, former surgeon and public university president Joseph Robertson earns $76,111 a month, the state’s largest government pension.

Should we be worried?

The word ‘crisis’ probably causes some anxiety, and there are major concerns with the decline of pensions in America. However, the situation isn’t hopeless. Although the crisis is prominent, and growing, not all states find themselves at a loss for funds. New York, Wisconsin, Tennessee, and South Dakota all have assets to cover nearly 90% of their liabilities, compared with 66% on average.

And according to the National Association of State Retirement Administrators (NASRA), change is coming. NASRA says that “nearly every state” has taken action to revise their benefits policy since the Great Recession.

While it is important not to panic, and to realize that states are putting in a concerted effort to make change, it’s also important to be aware of the situation. Especially if you are reaching retirement, you need to make sure you know what you’ll be working with in your later years in terms of wealth.

The major question is whether or not states will be able to pay their benefits as promised, with the large pension obligations they have accrued. Since the rise of defined contribution plans, however, people are more in charge of their wealth than ever. That may be frustrating, especially if you were relying on a large pension, but try thinking of it in a positive way. Having to take control of your own finances and coming up with your own savings plan can give you a sense of financial independence. It can also ease your anxiety about not knowing what’s coming in the future.

All in all, the pension crisis is a pretty big deal, but it’s important not to panic. More than anything, having an awareness of the economic pitfalls of losing a pension is your key to unlocking financial success and freedom. If you know what you have to work with, you can control your future, and not necessarily rely on a pension to get you through.

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Elisabeth Dawson is a financial advisor and the author of Wealth by Design. She is also the founder and CEO of Copia Wealth Management Advisors, Inc. and Copia Wealth Management & Insurance Services, designed to help clients achieve financial greatness.

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