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October 24, 2016

Watch Out for the Ballooning “Pension Crisis” in the U.S.

By James Murray, Wolf Street

In the very simplest terms, the Dallas Police & Fire Pension Fund is going broke, and the police who are counting on it for their retirement are beginning to panic. Police involved are retiring as early as possible and taking cash payouts because they fear that the fund will run dry and future checks may not be forthcoming. The whole thing is beginning to look like a run on a bank and it is just making matters worse.

It’s not that the DPFP is all that different from most of the public and private retirement funds; it’s just that what is happening has been noticed and made the headlines.

When you consider the number of people involved and the amount of money involved, the Dallas Police Retirement Fund is pretty insignificant considering that retirement funds in places like Chicago and the State of Illinois are probably in as bad a shape. Then there is the big daddy of all retirement funds, the Social Security Trust Fund.

Exactly why these funds are in trouble varies but the general view is that not enough contributions were collected, expected investment gains failed to materialize, and benefits were overpromised. Many of these funds also have a retiree health care component, and health care costs have risen dramatically. The bottom line is that these funds are having to pay out more than expected and they are not going to be able to deliver what they have promised without major changes of some kind.

The social implications are interesting to contemplate.

Suppose that you are a police officer in the State of Texas and you are looking for a job. Would you even consider the Dallas Police knowing of their retirement problems? Would you demand substantially more now to work for the Dallas police to offset the risk of making retirement contributions with a chance of never getting a retirement check?

If you were working for the Dallas Police and had enough time in to retire and had a choice of working longer and getting a bigger pension or retiring early, what would you do?

There are about 22 million people who work for government at some level, federal, state, or local and almost 100% of those jobs have some form of retirement plan. Some of those plans are in pretty good shape, a majority aren’t. Then there are 47 million people collecting Social Security checks as of today and that number is growing daily.

There are also a lot of retirement plans in the private sector – union plans, company plans etc.

When you add it all up, at least 20% of the people in the US depend on retirement checks of some kind and the number may be as high as 30% and there will be a lot more in the future.

Before 1935, when Social Security was created, retirement plans were few and far between. After 1935, they began to spring up everywhere. Unions began adding them to their demands, private companies used them as recruitment perks, and governments at all levels, run by politicians eager to gain votes, began adding them to their employment packages.

Before 1935, the general practice was that you worked for a company, got paid on Friday and you were even. If you worked there for a long period, when you retired, you got a party, a gold watch, maybe a small cash bonus and you were out the door. You were expected to save for your own old age.

Eventually, the idea of retirement funds worked out to: you contributed some money out of every paycheck, your employer contributed some amount. At a certain age or after a certain number of years of service, you could go home and a check would show up every month in your mailbox.

There are an awful lot of people that go to their mailbox monthly and retrieve those checks and they expect them to be there until they die. If those checks stop or shrink drastically, the effect on the economy is going to be tough.

The Social Security Trust Fund is going broke unless some drastic actions are taken. The facts are not in doubt, just the exact day that the last money flows out. Estimates run from 10-15 years.

With Social Security, there is a law that says that if the Social Security Fund should run dry, the government is obligated to pay 75% of the normal amount out of “general funds.” Exactly where the money from the general funds is going to come from is not explained.
If that should happen, the average Social Security check today is about $1200 a month. Cutting $300 on average a month on 47 million retirees is approximately $140 billion a year that instantly disappears out of the economy. Instant recession.

People with retirement funds at other government and private entities don’t always have such protection. If the funds run low, there is no guarantee of any kind in many cases. In some cases state and local taxpayers have to chip in. Taxes increase, fees rise: money gets taken out of the economy to keep these plans afloat. In other cases, the checks will decrease drastically, and this too cuts into the economy.

When you look at the number of people that depend on retirement checks and how much they depend on those checks, a collapse of the retirement systems would be catastrophic to a lot of people.

Politicians have known of these problems for years and have chosen to just kick the can down the road rather than face the politically painful choices required to fix these problems. Now the road is running out, and no matter what is done to correct the problems, 
retirees’ finances and spending are going to get slammed, taxpayers will be tasked to step up to the plate, and the economy will take another hit. 

Courtesy of James Murray, Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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