Enough about Social Security: For some, pensions are the more immediate issue
With the Social Security Administration’s recent update on its long-term financial health, advisors and their clients now have a new time frame for the anticipated depletion of the retirement program trust fund. Unless Congress acts, the trust fund is expected to run out of money in late 2034, at which point Social Security will be able to cover just 77% of retirement benefits.
For current and future retirees relying on Social Security, the thought of a 23% benefit cut may be worrisome, but at least they have 16 years to come up with a backup plan to make up for a potential reduction in benefits.
Many people in struggling private-sector pension plans don’t have nearly as much time. Some 1.4 million private pension participants may be seeing stiff pension cuts that in some cases could come as soon as 2028, according to recent report from the Society of Actuaries, a professional organization of actuaries.
The actuarial group analyzed 115 multiemployer pension plans identified under federal law as being “critical and declining” and projected that all but eight will become insolvent in 20 years. Of those, 50 are expected to go bust by 2028, affecting the retirement security of some 545,000 participants. By 2033, some 91 pension plans involving 920,000 participants will have gone belly up, according to projections.
As the name suggests, multiemployer pensions involve multiple employers, all usually within the same or related industries, and a labor union. Some 1,400 multiemployer pension plans covering almost 10.3 million participants, including 4 million retirees, are in effect today, according to the Department of Labor.
If the troubled 115 multiple employer plans become insolvent as expected, participants will receive anywhere from 90% to as little as 20% of benefits, said Lisa Schilling, a retirement research actuary at the Society of Actuaries.
And that’s with the support of the Pension Benefit Guaranty Corporation, a federal government agency that insures private-sector pension plans. In the same way that the FDIC insures bank deposits, the PBGC insures pension benefits up to a maximum annual amount of $12,870.
“It’s pretty grim,” said Schilling, explaining that the 115 troubled multiemployer plans suffer from what she calls “negative cash flow.” They’re paying out more in benefits than what they’re bringing in in investments.
Almost 75% of the plans have annual negative net cash flow or “burn rates” that is 10% or more of their assets, which means that unless they earn at least 10% per year, the plans will continue to weaken. Twenty-seven of the plans have burn rates of 20% or more.
“If you have a burn rate of 20%, that means you can expect to run out of money in five years,” said Schilling. “Even to slow it down, you have to get more than 20% a year — year in and year out — to to reverse the cycle that you’re in.”
The PBGC itself is in dire straits. In its latest annual report, it said that its multiemployer program is likely to run out of money by the end of 2025, which means that the level of financial assistance it can provide to failing plans will be significantly less if insolvency indeed happens.
While the number of pension plans has fallen sharply since the introduction of 401(k)s in the late 1970s, their number is still nevertheless significant. In addition to the 1,400 multiemployer plans, there are some 44,000 single-employer plans with more than 27 million participants, according to the most recently available data from the Department of Labor. Add to that another 6,000 public-sector pension plans covering nearly 20.5 million members.
While single-employer plans are generally in better shape than multiemployer plans, they too are struggling. Both types of plans are on the Government Accountability Office's high-risk list, the agency said in a recent report.
Sean Coumans, a CUSO Financial Services advisor with California Credit Union in North Hills, California, urges advisors to take note. Advisors, he said, should not brush off pensions and forget to factor them into their clients' retirement planning as pensions are part of their post-retirement income, he said.
Importantly, he added, advisors can play a critical role in helping clients with decisions stemming from faltering pensions. One of his clients whose pension from a previous career was deemed in “critical status” was asked to choose between receiving an immediate monthly benefit of $100 or waiting until age 65 to receive a monthly benefit of $500. The client, 50, opted to wait 15 years for the higher payout despite the pension’s critical status.
The client, who now works in the insurance industry, had worked in a grocery store for 10 years as a young man and was vested in the store's pension, Coumans said.
At a minimum, advisors should encourage their clients to pay attention to the annual pension notices they receive in the mail, according to Michael Devlin, principal of BCG Pension Risk Consultants.
“If they see funding level below 80%, that’s not a good sign,” he said, adding that participants should raise the issue with management.
“They have a loud voice within the structure of the company,” he said.
Devlin also encourages participants to file their annual pension notices so that they can track progress. If a pension remains stubbornly at a 77% funding level, especially after the market’s record run over the past 10 years, participants need to take note and prepare, he said.
Advisors also need to steer their clients away from poor pension decisions, particularly when offered lump-sum pension payments, according to Devlin.
As an advisor to plan sponsors, Devlin has often seen participants make the mistake of taking the lump-sum payment and putting the money into savings accounts, where they get “crushed” with a 10% penalty and state and federal taxes.
“It’s sad to see some of these people just ruin a fantastic benefit,” he said.
If participants choose to take the lump sum, they should roll the funds into a qualified account, such as an IRA or 401(k), where the money will continue to enjoy tax benefits.
“This is not to buy a boat. You’re supposed to live off of this,” Devlin said he advises participants.