Right across America, it seems traditional pensions are hard to come by. Now, the Treasury Department has allowed employers to pay a one-time lump sum to buy out retirees from their pensions. As a result of this reverse from President Obama’s own stance, there’s a concern for millions of people relying on the monthly check.
According to David Certner, AARP Legislative Counsel, this plan would threaten the retirement security of not only ex-workers but their spouses too. For many, this is part of a worrying shift that started in the 1980s. While defined-benefit pensions once allowed retirees money until death, the switch to finite 401(k) accounts has already removed a layer of security.
For many years, the Pension Benefit Guaranty Corporation has provided protection for around 26 million people in case employers go bankrupt. However, they’ve seen these numbers fall dramatically as more employers continue to close plans to new employees.
Why the Change?
Ultimately, pensions cause businesses problems. Investments in stocks and bonds are essential for pension funds to remain solvent, but our recent experiences in this market have provided us all with a warning. With pensions increasing in cost too, many businesses are seriously reconsidering whether they can maintain a pension plan for employees.
Lump Sum Buyouts
Recently, buying out employee pension plans has become more and more common. Essentially, they purchase an annuity with the money and hand the annuity to the retiree; the retiree is, all of a sudden, a customer with a private company. Alternatively, some employers have an option to predict how much an ex-employee would receive if they lived an average life before then paying this in a lump sum.
Known as ‘de-risking,’ it has quickly become common practice for huge names like Sears, Ford and General Motors, and JCPenney. Although retirees have the right to reject this offer, not many are equipped with the knowledge required to make the right decision for their future. Let’s face it; being offered a huge sum of money can also seem appealing.
Sadly, a MetLife study from 2017 had some shocking results for those who accepted the offer. Not only did nearly 33% of people regret using the money for short-term purchases, around 20% spent the lot within six years. When offered hundreds of thousands, it can seem too alluring, and retirees can forget this money really isn’t like winning the lottery when spread out over, potentially, 20 years and more.
Important Time for Retirees
Back in 2015, a report was issued by the Government Accountability Office showing that employers were getting away with paying less than the pension’s actual value. Considering interest rates and mortality data, even those who reinvested the money would still lose out. Yet, companies weren’t required to provide such information. Meanwhile, the eyes of many financial advisors lit up seeing the opportunities they had with the lump sum (which exacerbated the issue further!).
According to the policy director of the Pension Rights Center, no matter how tempting it may be, replicating the rates of a pension plan is almost impossible. After the report, those already in retirement could no longer be offered the option…until the Trump administration.
For many retiree protection agencies, they believe allowing companies to offer this to retirees is a bad idea. Once you consider that they’re even being incentivized to do so with the increased PBGC premiums, this is a bad concoction that could ruin lives.
In the time ahead, many experts worry that the draw of a lump sum will be too much to resist for those living on pension payments. With these retirees not being informed of the risks, there will be many voices speaking out against this reversal. For retirees, it’s important they seek impartial advice and understand what they’re actually being offered before making a decision.
