Will You Get the Pension Payout You've Been Promised?
Why you might get much less than you expect
Ric Edelman: It's Monday, May 15th. The Biden administration has given $36 billion to the central states pension fund. This is the largest amount of federal aid ever given to rescue a pension fund that's going broke. The money came from the $2 trillion in Covid funding that was provided by Congress back in 2021.
The Central States Pension Fund provides retirement benefits to 350,000 members of the Teamsters. The plan has been severely underfunded for years and have President Biden didn't provide this $36 billion bailout. The union membership would have seen their retirement benefits cut by 60% within just a few years. We're talking about workers throughout the Midwest, the so-called flyover states - Michigan, Ohio, Missouri, Illinois, Texas, Wisconsin. You get the hint. A lot of these are battleground states for the 2024 election. Nothing like $36 billion going out to 350,000 union members to win a few votes.
But this money doesn't really solve the bigger problem. Public pension funds, depending on who you ask, are short by about $1.5 trillion. That doesn't include the shortfall of pension plans offered by corporations. We have gotten into this mess for two fundamental reasons. We aren't providing enough money into those plans. In other words, workers are not being asked to put enough of their paycheck into these programs. States that are funding these plans aren't providing enough taxes into the programs. We don't want to tax people too much.
Unions don't want to ding their members for any more in membership dues than is necessary. State legislators don't want to earmark any more money from state budgets than they have to go into these plans. They'd rather put the money elsewhere and whatever money these plans do manage have been earning returns that are too low to meet their goals. The average pension plan assumes that they're going to earn 6.9% per year, and they've been earning less than that.
The result? Not enough money going into the plans and the plans not earning enough on the money that they've got. The result is that the plans aren't accumulating enough in assets to pay the benefits that they've been promising their workers. So what's going to happen? Are these plans, in fact, going to go broke? Are they going to have to one day send a letter to their retirees saying, sorry, we've been promising that you'll get a certain amount in pension benefit, but we don't have the money to pay you. Gee, too bad. You really think those letters are going to go out in the mail? Hardly. The government is more likely to give them the money that they need, just like Joe Biden has now just done with $36 billion going to the Central States Pension Fund.
This isn't a red/blue issue. This is an election issue. No politician from either party in any state is going to be willing to allow people in their states to discover that they're getting only a fraction of the money they've been promised. No politician will ever be able to say to a voter, You're not going to get the money we said you were going to get. That's a good way to get voted out of office.
So how are they going to fix it? Well, they could have these pension funds earn higher returns, but they're not in control of that. The alternative. More funding into the plans and where are they going to get that money? Taxes. So you can expect in your future higher tax revenue. That is inevitable. Plan for it as part of your financial projections about your own retirement future.
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