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Public Service Pensions: Here Today, Here Tomorrow?

Can you really afford to retire? For many American who trusted their employers’ pension plans to be the mainstay of a comfortable retirement, the answer is no. Many employees, particularly those in the public sector, are approaching retirement age only to find that there’s a gap between what they were promised and what they can expect to receive from their pension plan. This means that a growing number of workers will need the alternative strategies Jason Hartman recommends in order to establish a stable income in retirement.

As the nation’s financial crisis deepens, employers across the United States have been forced to grapple with the thorny issue of how to fund their pension plans for the long term. And many of these employers have responded by placing a greater burden on their employees to fill the gap between their promised and actual pension benefits—and by limiting the amount of benefits paid to retired workers.

To solve their pension funding problems, employers must look either to ways to reduce the company’s contribution or to increase the amount paid in by employees. Private sector employers have sought the freedom to cut future payouts to employees currently on the payroll, in a move that some see as a direct violation of the employer-employee contract.

But while employees in the private sector appear to be at the mercy of their employers’ decisions to cap future pension payouts, public sector workers had reason to believe their pensions were relatively safe. In many states, public employers are legally prohibited from altering their retirement plans. In other words, in the public sector an employee should be able to expect to receive the full benefits of their retirement plan as long as they work until retirement. If the employer decides to cut future benefits that change would apply only to new personnel hired after the date of the change.

Although public sector employers may not be able to directly cut the amount of benefits they must pay a qualified employee, they can get around this problem in other ways. One of these is to require employees to increase their contributions to the plan. This way, employees get the full amount of pension funding they were promised, but the employer’s contribution is significantly lower.

Similar problems have begun to affect the pension of current public service retirees, who in some states have seen either a reduction or a suspension of the their annual cost of living adjustment, or COLA. Although this strategy has been challenged in court, the suspension of COLA benefits had been upheld. The argument? COLA benefits are not part of the core benefit plan with its promised payout. Rather, advocates argue, COLA is a separate entity that everyone knows is subject to change and reductions are necessary to prevent the breakdown of the plan as a whole.

For these reasons, public sector employees who are nearing retirement may not be able to count on the retirement benefits they expect. Unlike in years past, retirees and those nearing retirement age must take charge of their own retirement income in order to ensure a comfortable lifestyle. Jason Hartman’s investment strategies are dedicated to helping pubic-sector workers not just to survive the pension plan crisis, but also to thrive by creating stable new income streams. (Top image: Flickr | discoodoni)

The Heroic Investing Team


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