Are Pensions in Financial Trouble? Ep. 92

The Wall Street Journal ran a headline on Monday this week that read, U.S. Retirement Funds, Heavy on Stocks, Brace for Losses. It said, “A sustained downturn could squeeze state and local government budgets.” Article here

While pensions have been slowly phased out from most workplaces, many governments are still using them. But most pensions today are a far cry from how they were originally used. The first issue came about when employers began putting the burden of retirement readiness on employees in the last 1970s.

Congress passed a law in 1978 that allowed for a tax-deferred 401k. Employers thought it was a great thing because they were no longer responsible for paying an indefinite amount of lifetime income to their employees in retirement, and the employees could buy the company’s own stock in some cases. This was a double win for employers.

A pension manager used to look at a hundred-year swath of time and he or she could plot out boom and bust cycles. This is not as easy to do anymore because the government does things like keep interest rates artificially low for years on end.

Pensions are interest rate sensitive and must have normalized rates to work properly. For the better part of the last twenty years interest rates have been ultralow, so it has made generating a sure income for retirees with pensions a challenging proposition. This is the second major challenge pension systems have today.

What have governments done to compensate? They started using risk assets like equities. When equities are used, the value of the underlying portfolio fluctuates with the market. Then, how well funded the pension system is depends on ho

As a society we have experienced one challenge after another the last few years. I highlight the issues with pensions because I know that this impacts many of our clients and readers and my goal as an advisor is to help you avoid pitfalls that stand between you and a successful retirement. And we can’t do that if we are not informed of challenges. We want to be cognizant of these things because this may inform how our other accounts are allocated.

If you have a question about anything covered here, please reach out to me by calling our office at 864.641.7955. I would be happy to share with you how we help mitigate against risks in retirement.

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