Your Retirement Income is Toast!

I’m a guy past retirement age. I paid into various retirement programs and accounts for 50+ years. Yet here I sit today feeling shortchanged for many reasons. And though I have diligently participated in these programs, they’re NOT what they were promised to be.

What about you? To be honest, unless you made cash deposits into a direct savings instrument of some kind for a long time, you’ve had no real guarantee your investments have been managed properly with realistic ability to grow and certainly no guarantee of its “today” status. There are no guarantees that the retirement program which holds your retirement dollars will pay you what you were told you would receive when you started.

I’m not a federal government conspiracy guy, but what I for years suspected has been revealed as truth: in the U.S., the only workers whose retirement benefits are fully guaranteed to perform at the levels promised years ago are federal employees. For many others, it’s almost like rolling the dice. The engine of guaranteed payouts at promised levels for those federal employees is YOU AND ME: American taxpayers pay through our tax dollars for any shortages in federal employee pensions.

I have a good friend who was a lifetime top-level corporate manager for an American automaker who was promised amazing retirement benefits. He participated in employee matching programs and stock benefits for 50 years or so. Then came the financial crisis in the auto industry. President Obama intervened to prevent that automaker from shutting down.

On his authority, the President began all those things necessary to restructure that company to a financial status that could be sustained. There are only two ways to a bottom line: Revenues and Expenses. Revenues can be increased and Expenses can be reduced. The federal government stepped in to do the only possible “fix” in this case: cut expenses.

A key component of expenses in a large manufacturing company is personnel costs. The “new” management — the Obama White House — slashed expenses financially company-wide. A key focus was on personnel expenses. In that process, the UAW, on behalf of its union members, stepped in and “forced” the federal government to protect retirement benefits for the company’s UAW members’ pensions, but NOT the retirement benefits of the company’s managers. Management members were NOT UAW members. My friend was forced to settle for pennies on the dollar of his retirement benefits.

Who inevitably cost those thousands of company managers who had paid millions into pensions that with one swift motion lost more than half? The federal government.

There are many ways similar travesties regarding retirement dollars of Americans are impacted by wrongdoing. Not surprisingly, the U.S. government almost always fits into the picture. There are 22 million Americans employed by federal, state, and local governments. Because of that, one would think the federal government would be all about taking care of the retirement for its workers.

And with the “Big One” — Social Security — one would think the government makes federally backed pensions and Social Security “Financial Project #1.”

It’s not looking that way. Let’s take a look.

Robbing Union Pensions

Do you have a union or government pension? Were you told your retirement funds in that pension are guaranteed by the government and that your pension fund will be there for you forever? It ain’t true.

A recent story published by FOX News tells the tale:

The pension collapse is coming. Current retirees may find their pension check is cut by 10 percent or 50 percent. “We just don’t have enough money, and the amount of money that we have to put into this is just mountainous,” says Malanga, of City Journal.

Neither party wants to make the tough choices involved. “Both Democrats and Republicans have incentives to short the pension fund,” says Joe DiSalvo, Malanga’s fellow journalist. “For Democrats, if we can not put as much in, we can free up more money for greater public spending on public programs that we think are good. If we’re Republicans, we probably want to cut taxes.”

“Ten years from now, they’re gonna have a problem,” says Malanga. “But 10 years from now somebody else is in office!”

Some pension plans are promises that should never have been made, but few politicians will say that. At most, they talk about making small changes to “keep our promises.” Small changes won’t be enough. Detroit and several California cities already ran out of money and declared bankruptcy. “At some point, your debts are so great that you can’t afford to provide basic services to people,” says Malanga. “Police force, fire protection — all will be on the chopping block,” added DiSalvo.

Instead of making cuts now to avoid crisis later, some politicians increase retirement benefits. New Jersey passed 13 separate benefit enhancements between 1999 and 2003. I assume politicians make these unsustainable promises because powerful municipal unions demand them.

“Public employee unions regularly lobby and seek to elect politicians who offer them better compensation packages. They’ve been intimately involved in the whole system from the beginning,” says DiSalvo.

But Steven Kreisberg of AFSCME, the biggest government workers’ union, tells me that unions didn’t create this problem. “There’s plenty of money with which to pay our people.” What about the $5 trillion in unfunded liabilities? That’s “a figure that’s used by some anti-pension zealots,” replied Kreisberg. “It’s fake news.” But it’s the number (actually, now $6 trillion) you get if you use accounting standards that the federal government demands from private pension plans.

Unions fight to keep every penny that politicians promised. But Detroit’s bankruptcy changed the rules on that. “The federal bankruptcy judge created a precedent that said pensions could actually be cut,” says DiSalvo. “That was a shock to the unions. It called into question these strong legal protections that public pensions have so long enjoyed. They can’t just sit back and say, well, we’re going to get paid no matter what.”

Some politicians hoped that a rising stock market would fund their promises. Many assumed their investments would grow by more than 7 percent per year. Do you make that much on your savings? I don’t. Seven percent seems like wishful thinking. Malanga says it was “more than wishful thinking. It borders on criminality, frankly. If after nine years of a bull market we haven’t begun to fix this, when are we gonna fix it?”

Malanga and DiSalvo argue that the only honest way to fix it is to reduce benefit levels and switch to individual retirement accounts like private sector 401(k)s. That way, instead of a promise backed by nothing more than political hot air, there’s an actual account with money in it, and people can track how well their retirement investments do. The politicians and union bosses, by contrast, would like to ignore the problem — until one day, no matter what promises they’ve made, they simply won’t be able to keep them.

Is Social Security Going to Be Around When I retire?

Have you ever heard that “Social Security would be doing just fine if the thieving politicians hadn’t stolen all the money from the Trust Fund that we paid in to earn our benefit checks.” Or “Social Security is broke.”

The Social Security Administration does invest its surpluses. Those surpluses are the revenues from FICA taxes, taxes on Social Security benefits, and interest credited to the Social Security Trust fund, (yes there IS one) less benefits paid out, into government bonds. And if you or I, or a pension fund, happened to exist in government bonds, we wouldn’t consider that investment to be “fake,” or the money to have been “stolen” from us. It’s real money, and we’d have a real right to that money. In the same way, the Trust Fund will redeem its bonds when it begins to run out of cash to pay benefits.

But there’s more to the story.

The trust fund is not a matter of “us” saving for “our retirement.”  There was a real element of building up surpluses during the early years of the program, though not to the degree that would make it an advance-funded program, rather than only partially-so.  The Trust Fund was virtually depleted in 1983, and the system would have been unable to pay full benefits but for FICA contribution increases beginning in 1977 and accelerated in a 1983 bipartisan reform bill, which also raised the retirement age to 67 and otherwise stabilized the system’s finances.   The funds which have built up since then are the excess of revenues over payouts following the tax hike. That’s not how you would see it in a pension fund or an IRA. Its function is really just, in principle, “to smooth out spending over time.” (When has the federal government “smoothed out” spending over time!)

Americans in large view Social Security from a simple perspective:  Having paid taxes during our working lifetime, we have a moral right to our Social Security benefits, or to a retirement free of financial worry. And this is not the case. Why? The federal government.

In George W. Bush’s second term, his featured legislative promise to retirees was to overhaul Social Security for their benefit. I attended a meeting he held in which he detailed a private/government Social Security plan in which Americans at younger ages could choose a Social Security plan linked to a private retirement plan. Some payroll deductions for retirement would go to Social Security. Some deductions would go into an individual retirement plan. Percentages of contributions would vary based on ages. The older one got, the Social Security plan investment would be reduced. The President’s idea failed miserably. Americans simply refused to trust the government to effectively manage all of their retirement funds. The issue put many older Americans in a place of uncertainty about their financial futures as they approached retirement age. And there was (and still is) the uncertainty of there really being a “real” Social Security Trust Fund created and managed to ONLY receive and payout seniors’ Social Security Benefits.

The bottom line is that whether the Trust Fund is “real” or just fiction on paper, in the end, it doesn’t matter. Whether the Trust Fund uses its assets to pay retirees, and the federal government has to borrow to pay back that debt, or whether the government has to pay those benefits directly, it’s still the case that money has to be found — and the amount of money which will have to be found, for retirement benefits, Medicare, and other expenses, is forecast to grow dramatically.

According to the Brookings Institute, due to the aging of the American population, federal spending on the elderly is forecast to grow from the current level of just over 20% of GDP, up to 29.4% in 2046 — and that’s not 29.4% of government spending, but 29.4% of our total economic output.  And this isn’t just a temporary “hump” due to the Baby Boom.

I wish we had a rosy answer to what should be done to protect those currently receiving Social Security retirement benefits and those who certainly will get there. The one federal government promise seniors hold onto is the promise that “if you pay a small amount every month into your Social Security account, your employer will match that dollar for dollar. Then when you retire, you will be paid by the government monthly the benefits owed to you until your life ends.”

I don’t feel there have been any instances of government illegality regarding Social Security. But there certainly have been scads of incorrect and purposely misrepresented Social Security presentations by those in Congress for decades. Many have for political campaigning purposes actually used the uncertainty in Social Security’s funding future against opponents. Who will ever forget the Democrat Party ad during the 2012 presidential race between President Obama and Mitt Romney? In the ad, a man who looked like Romney’s vice presidential running mate, Paul Ryan, was pushing a wheelchair with an elderly woman sitting in it over a cliff. Its purpose was to portray an image of a Romney presidential administration taking actions in Social Security that would kill grandma. They, with that ad, were using the fears of elderly people to score political points not FOR President Obama, but against Mitt Romney. And the message in that ad was untruthful. In effect, they USED Social Security to score political election points from petrified Social Security elders.

One can easily say they’re doing that along with NOT doing anything to repair the problems with the system IS at least morally wrong. After all, for 50 years I’ve paid them that percentage of my wages each payday, my employer has matched that amount each payday, and the government has control of its investment and its growth. In the private sector, there are many today sitting in jail who have misrepresented investment savings plans to entice Americans to invest. The investments were unwise or illegal or both, and that investment specialist ends up with a pot full of money but the investor little or none. Just remember “Bernie Madoff” cost many seniors collectively $64 billion.

Summary

There’s no magic “fix.” Social Security is what it is. Honestly, it’s an iffy retirement plan. Just like in any investment situation, in Social Security, there’s no magic or guarantee.

As we’ve seen again and again, even in pensions, there are far too many unknowns and too few certainties for those who are invested to be confident of the results that have been represented to them. You saw the section above that details the amounts of dollars in pensions that are today unfunded. What happens if and when they fail and those pensions that are backed by the U.S. government declare bankruptcy. We’ve been told the federal government underwrites those so U.S. taxpayers will take the hit. What if there’s a massive financial disaster for the nation and the government CANNOT pick up the tab for those pension retirement losses?

There’s no warm and fuzzy ending here. Why? I don’t have one. The federal government doesn’t have one. Your bank doesn’t have one. Nobody has a guaranteed warm and fuzzy answer for the question, “What will happen if my pension or Social Security cannot pay my retirement benefits, and the government cannot pick up the tab?”

I know: I’ve hit you with a downer right before the weekend! I don’t mean to bring you down, but sometimes bad things happen to good people. In investing, there are far too many unknowns that play into anticipated results that will not occur for 30-50 years. And no one can tell the future.

What do I suggest? Setup and be faithful to a retirement plan! What type of program, which plan, and how much to invest under what conditions are things you will have to tackle yourselves. But do it!

The other thing: speak to your lawmakers about Social Security: it’s the “Big Kahuna.” Why do I encourage that? 98% of you are paying into Social Security today and will be until you’re 60+. Why not fight to make sure YOUR investment is taken care of and that its results — good results — will be there when you need them.

On that note, grab a cup of coffee and get back to worrying about coronavirus and the stock market plummeting of yesterday. You need something positive to ponder!

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