It is one thing to read about pension problems, it is another thing to experience them first hand. In the last few years, we have seen several cities completing the negotiations and enacting plans for the restructure of pension obligations and payments. It is likely that restructuring of both government and private pension plans will become more frequent. The restructuring of pension plans for several cities in the last two years may serve as examples or road maps of the larger plans currently in jeopardy. The restructuring negotiation involves three broad areas: adjustments in payments into the plan, costs of running the plan, and payments to future and current beneficiaries. These areas are controllable, unlike projected rates of return which are not.
The topic of this discussion is the treatment (or abuse) of retirement plan beneficiaries. They worked for many years in their positions and were promised pensions as part of the compensation package. After retiring, they may be presented with devastating changes in their monthly income resulting from the re-negotiations.
Last year the city of Detroit enacted such a plan. The following article (see here) highlights several examples of the effects on current retirees. In summary, they had to:
1. Repay excess interest that accrued in the city-run savings plan by a lump sum or a reduction in their monthly pension check
2. Suffer a reduction of promised monthly benefits
3. Have a significant increase in the cost of health insurance
Other pension plan retiree’s may not fare as well. The Central States Pension Fund retirees could experience up to a 60% cut in monthly benefits (see here). One might assume the younger retiree’s will have the largest cuts and older retiree’s might not have any reduction, but a broader base would spread the pain.
Surprisingly, this might not permanently solve the issue. A paragraph in the article mentioned above (see here) about Detroit indicates a projected annual rate of return of 6.75%. Although this rate is lower than the prior assumed target rate of approximately 8%, several large pension plans have recently earned less than 2% (see here). These results are at a point where bond and stock prices are at historic highs. If earnings of the plan do not meet assumptions, it is reasonable to assume another restructuring would be needed. The only thing worse than a drop in income is several declines.
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