Last Updated Sep 8, 2009 9:24 AM EDT
Example. The Ohio State Teachers Retirement System recently issued a newsletter to its members about changes that are being considered to their pension program. Essentially, the system is significantly underfunded. If changes aren't made, the newsletter indicates that eventually the pension system will not be able to pay members' projected benefits.
Here are some of the changes that are being considered:
- Higher contributions from employees and employers.
- Changes in pension benefit formulas, which means employees may receive smaller pensions than anticipated.
- Changes to or elimination of the cost of living increases in pension benefits, which means pension lifestyles would be decreasing every year as inflation eats into the value of the pension.
Why is this happening? In general, the main problem with public pensions is that the retirement benefits have been consistently increased over the years but the required contributions have not. This means that not enough money has been going into the pension plans to support the promised benefits to current and future retirees.
- During the bull markets of the 1980s and 90s, the funding deficits were masked by the out-sized stock market returns. Also, those big stock market gains encouraged increases to pension formulas without corresponding increases to the funding obligations.
- But the last 10 years of terrible stock market returns has exposed this funding mismatch between contributions and promised benefits.
- To correct the funding problems, pension managers now have to consider cutting benefits for future retirees and also increasing contributions for current employees.
What to do. If you're a public employee, you should recognize the possibility that you may not get as big a pension as you thought. Thus, you should consider saving outside of your pension plan so that you have additional resources to address potential declines in your pension benefits. Most public employers offer 403(b) or 401(k) plans that you can use to save additional amounts for retirement.
- Also, read all the notices you get from your pension plan and stay informed about the plan's funding status. Next time they discuss benefit increases or decreases, make sure you voice your opinion and insist that the system be run under conservative financial assumptions. Otherwise, that hot potato may get even hotter.
As with all financial matters, consult your individual financial advisor before making any decisions.