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Your Retirement Is In Your Hands

5 August 2010 One Comment

By Monty Pelerin at www.economicnoise.com

People in general are optimistic. Successful people in any occupation usually exhibit this characteristic. Though it is a contributing attribute to their success, optimism must be exercised with caution. The noble assume that promises and commitments will be met. Yet in the realm of retirement promises this is unfortunately untrue.

No one is more optimistic than politicians, especially when they are dealing with other people’s money. They make promises that cannot be fulfilled. “Promise anything, let the other guy worry about it” seems to be their strategy. By the time the problems become apparent, the typical politician is long gone from office.

Nowhere is this more evident than in the state, local and Federal pension areas. These benefits are the ideal political Ponzi scheme. Promise benefits today that won’t be paid until some long time in the future. No need to worry about the “long-run.”

The likelihood of anyone under 50 collecting social security upon retirement is slim. It is unlikely to be there when you retire. State and municipal pension funds are also in similar financial condition.

Private pensions have been affected by poor market performance as well. Just as your 401K has been hurt over the past ten years, so have investments managed by pension funds. Because the assumed returns were not earned in the last decade, many private pensions are underfunded with respect to the amounts needed to meet their promises.

The pension problems in this country are enormous and underreported. In the words of Michael Snyder:

Once upon a time, you could count on getting a big, fat pension if you put 30 years into a job. But now pension plans everywhere are failing. State and local governments are cutting back and are raising retirement ages. A majority of Americans have even lost faith in the Social Security system, which was supposed to be the most secure of them all.

The reality is that we are moving into a time when there is not going to be such a thing as “financial security” as we have known it in the past. Things have fundamentally changed, and we are all going to have to struggle to stay above water in the economic nightmare that is coming.

Part of the reason we have such a gigantic economic mess on the way is because we have promised vastly more than we can deliver to future retirees. When you closely examine the numbers, it quickly becomes clear that a financial tsunami is about to hit us that is going to be so devastating that it will change everything that we know about retirement.

Does this mean that pensions are about to stop immediately? Some might, but most will not–at least not right away. The plans have funds that will enable them to make payments for some period of time. The further forward in time, however, the more funds will be unable to meet their obligations.

It is important for everyone to take charge of their own retirement. Promises made by employers and governments are apt not to be honored in the coming economic debacle. To provide an idea of how serious the problem is, Mr. Snyder has enumerated 22 statistics regarding retirement programs:

Private Pension Plans And Retirement Funds

1 - One recent study found that America’s 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008.

2 - Approximately half of all workers in the United States have less than $2000saved up for retirement.

3 - According to one recent survey, 36 percent of Americans say that they don’t contribute anything at all to retirement savings.

4 - The Pension Benefit Guaranty Corporation says that the number of pensions at risk inside failing companies more than tripled during the recession.

5 - According to another recent survey, 24% of U.S. workers admit that they have postponed their planned retirement age at least once during the past year.

State And Local Government Pensions

6- Pension consultant Girard Miller recently told California’s Little Hoover Commission that state and local government bodies in the state of California have$325 billion in combined unfunded pension liabilities.  When you break that down, it comes to $22,000 for every single working adult in California.

7 - According to a recent report from Stanford University, California’s three biggest pension funds are as much as $500 billion short of meeting future retiree benefit obligations.

8 - In New Jersey, the governor has proposed not making the state’s entire $3 billion contribution to its pension funds because of the state’s $11 billion budget deficit.

9 - It has been reported that the $33.7 billion Illinois Teachers Retirement Systemis 61% underfunded and is on the verge of total collapse.

10 - The state of Illinois recently raised its retirement age to 67 and capped the salary on which public pensions are figured.

11 - The state of Virginia is requiring employees to pay into the state pension fund for the first time ever.

12 - In New York City, annual pension contributions have increased sixfold in the past decade alone and are now so large that they would be able to finance entire new police and fire departments.

13- Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern’s Kellogg School of Management recently calculated the combined pension liability for all 50 U.S. states.  What they found was that the 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside in state pension funds.  That is a difference of 3.2 trillion dollars.

Social Security

14 - According to one recently conducted poll, 6 out of every 10 non-retirees in the United States believe that the Social Security system will not be able to pay them benefits when they stop working.

15 - A very large percentage of the federal budget is made up of entitlement programs such as Social Security and Medicare that cannot be reduced without a change in the law.  Approximately 57 percent of Barack Obama’s 3.8 trillion dollar budget for 2011 consists of direct payments to individual Americans or is money that is spent on their behalf.

16 - 35% of Americans over the age of 65 rely almost entirely on Social Security payments alone.

17 - According to the Congressional Budget Office, the Social Security system will pay out more in benefits than it receives in payroll taxes in 2010.  That was not supposed to happen until at least 2016.  The Social Security deficits are projected to get increasingly worse in the years ahead.

18 - 56 percent of current retirees believe that the U.S. government will eventually cut their Social Security benefits.

19 - In 1950, each retiree’s Social Security benefit was paid for by 16 U.S. workers.  In 2010, each retiree’s Social Security benefit is paid for by approximately 3.3 U.S. workers.  By 2025, it is projected that there will be approximately two U.S. workers for each retiree.

20 - The shortfall in entitlement programs in the years ahead is mind blowing.  The present value of projected scheduled benefits surpasses earmarked revenues for entitlement programs such as Social Security and Medicare by about 46 trillion dollars over the next 75 years.

21 - According to a recent U.S. government report, soaring interest costs on the U.S. national debt plus rapidly escalating spending on entitlement programs such as Social Security and Medicare will absorb approximately 92 cents of every single dollar of federal revenue by the year 2019.  That is before a single dollar is spent on anything else.

22 - Right now, interest on the U.S. national debt and spending on entitlement programs like Social Security and Medicare is somewhere in the neighborhood of 15 percent of GDP.  By 2080, those combined expenditures are projected to eat up approximately 50 percent of GDP.

Your financial planning must be geared toward a retirement income not dependent upon other people’s promises. That is, only you can be counted on to provide for your retirement. Trusting others, no matter how well intentioned they may be, is not something that is wise in the economic times ahead.

One Comment »

  • 20smoney said:

    Taj, except that my other forms of insurance are voluntary participation at least for now.