The State of Pension Plans in the United States

Making Smart Decisions with Josh Tirado

Josh Tirado: [00:00:20] Welcome to the making smart decisions podcast. I'm your host, Josh Toronto. And today, we are discussing pensions. Is it a sheep, or is it the Wolf? Or is it just a Wolf in sheep's clothing? Let me jump into the pension thing here and try to delineate a little bit.

[00:01:19] When I am talking about pensions. I am talking about pensions from companies, not from the government, and quasi I mostly pension from smaller branches of government. So not necessarily federal pensions, but maybe something along the lines of that, of a state pension.

[00:01:35]The vast majority of people no longer have a pension 40 years ago, the vast majority of people. I had a pension, and that was a big push on retirement. Pensions became very expensive. They were hard to manage. They went away. The 1980s saw the rise of the 401k, and that really replaced the pension.

[00:01:49] So it used to be that, Hey, I had a pension, the company put so much money aside. Maybe I contributed to it. Maybe I didn't, depending on what setup you had. And when you retired, you got a certain amount of money, which was guaranteed for all these years in your retirement. And it was awesome. And everyone worked towards their pension fund people for years joked about the gold watch, and I got a pension.

[00:02:05]When I retired, the pension became hard to manage. It went away. And the onus of retirement transferred from the company you worked for over to you with the rise of the 401k. Because now you're consuming your money. You're getting a match from the company. But now you have to manage the investments that are in their project.

[00:02:21] How much is going to be in there? So it's no longer the company during a pension taking care of you. It's you taking care of your own money? Pensions used to be far and wide, very accepted, very common pensions are not that anymore—several large companies over the past 10 years.

[00:02:35]Have eliminated their pensions for people under a certain amount of time, say employees are there for less than five years, less than 10 years. And new hires, no pension people that have been there longer than that, the pension's there, but it's frozen. And then you have some older people that they know will be retiring out or taking a package in the next five years.

[00:02:50]And their pensions remained fairly unchanged, but the companies had moved away from pensions. Let me discuss that for the few of you out there that still have pensions. Let me touch on that from a private company. Again, I see this left and right with my clients. The pensions are being frozen.

[00:03:02]The pensions are going away. They might give you a lump sum, payout of some money towards your 401k, but then the pension is going away. So when I am doing retirement planning for my clients and have a pension, what is becoming increasingly popular as a stress test is. We don't count their pension at all.

[00:03:17]It used to be that we would say, what if something happens? You don't get the projected pension cause it's 20 years out. And maybe the company doesn't do as well, or maybe they freeze it, and we would show them a reduced pension. My clients are savvy.

[00:03:28]They're smart people. And not just smart because they choose to work with me. But because they are smart, savvy people. We're looking at the associated risks with the pension and the companies' health, they're working for. Even the healthiest companies are getting rid of them.

[00:03:40] So we've actually started just eliminating the pension from their retirement planning projections. And we want to make sure that they can afford to retire on their own. And if they get the pension, great, it's gravy, but they're not relying on it. So I caution you if you are not doing.

[00:03:54] a

[00:03:54] Josh Tirado: [00:03:54] separate IRA or Roth IRA or 401k, and you're just relying on a pension.

[00:03:59] And you're not within five years of retiring. That will probably not work out for you as well as you initially thought. That is the overwhelming trend in the United States today. So please be very careful again, we don't even consider their pension. If they're more than five years out from retirement or dramatically reduce the pension projection, the federal government will do everything in their power to stay.

[00:04:20] And I'm jokingly saying, stay in business. But the government can raise taxes, collect more money and continue to govern the people, and make their pensions work. They make the pensions happen now—several government pensions of receiving the pension. You're not receiving social security, so you are not able to quote-unquote double dip there.

[00:04:35] So please bear in mind that, Hey, if I'm getting this pension, you're not getting social security again. The pension there is more reliable, but we don't know how much you're going to receive from that pension, or could it be changed in the future? So please, once again, take a little control, take some more of the money into your own hands and do some other outside investing, just online, a pension.

[00:04:53]Then we have this kind of strange hybrid scenario called smaller pensions where it's state-run. Some states have done a very good job of managing their pension fund. And the ones that pop into mind first are just the States that are managing the pension fund for teachers, police, firefighters, state workers, that sort of thing.

[00:05:11] some other States have horribly mismanaged it and even passed rules where they were allowed to borrow money out of the pension plan, to cover expenses and nothing to do with the pension, with no requirement to pay it back and no requirement to pay themselves any interest. So now, not only is that money has not been returned to the pension plan.

[00:05:25]But that money was not invested. Earning return for the pension plan during that same period of time. And now you have a woefully underfunded pension, which will result down the road in people receiving a reduced pension. Potentially, the States could even default. There are some States that when COVID hit, and they were running this so much economic, no grant, they had already been in economic trouble for the previous 10, 15, 20 plus years.

[00:05:46] But COVID hitting amplified it to the point where there are some States considering, and they publicly announced this, the governors publicly announced it, that the States would consider bankruptcy as a way to restructure the debt and what the obligations of the state were. It would be interesting to see if those pensions were going to, depending on the bankruptcy court, if those pensions would be protected.

[00:06:07] Or if they only had a fund the pension with some minimum amount of money or who knows what was going to happen. But all I know is that if I was relying on a pension and I plan to receive a pension from the state for my years of hard work, and that state was in such bad financial straits, it was considering going bankrupt.

[00:06:25]And the pension fund is massively underfunded. I'm not going to feel too comfortable about that pension. And I know a lot of people that are working on getting their 25 years, so they can get out and get their pension, but there are talks repeatedly about what's going to happen with that pension.

[00:06:38]I know some teachers in that position. I noticed some police officers in that position and some firefighters in that position. It's scary because, in many instances, they don't have separate money...