Forget the Pension and Take the Lump Sum


Crumpled Dollar

For those lucky enough to have a pension benefit, at retirement most get the option of either taking the lifelong pension payment or instead taking a lump sum.  At one point in time, that was a tough decision.  There is a sense of security to a plan that pays out a consistent monthly income.  Today, that decision is a no brainer – take the lump sum or risk not having a pension benefit at all.

There is a subtle disturbing trend occurring with pension benefits.  Not all pension plans are in good financial shape.  In fact, many are facing the prospects of running out of money.  The problem is a combination of losses incurred during the financial crisis in 08 and the simple fact that there is just not enough money coming into these plans to keep them well funded.

The Central States Pension Fund is just one of those funds.  It announced a proposal that would cut pension benefits on average by 23% for roughly 407,000 workers.  How can they do that?

The Government quietly passed legislation last year that allows multi-employer plans to reduce current benefits if they potentially face insolvency.  After all, the Government has to step in with their insurance fund if these plans go belly up.  As the Government is fond of doing, they shift the burden of loss on the retired employee making their problem.

It is a start of a disturbing trend.  Employees worked hard for those pension benefits and rely on them to live.  If the money isn’t there, well it just isn’t there.

This is the problem with the debt crisis that we face.  Pensions plans are part of that crisis.  Pension payments are a liability just like a debt.  They represent a future commitment to provide a benefit just like a debt represents the future commitment to pay it back.

You clear up a debt crisis in one of two ways.  You either pay back the debt or someone loses and the debt goes away.  For 7 years, the Government has done neither and allowed more and more debt to accumulate preventing losses from happening.  However, loss is inevitable because the creation of debt has an end game.

Could we be at the beginning stages of the Government allowing the losses to happen?  Unfortunately, the ones who should be incurring the losses are not the ones who are going to suffer.

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