The Push for Pensions Has ReturnedTrevor Gerszt
Recent reports that Congress had considered significant reductions to 401(k) contributions have spurred calls from some quarters for a return to pension plans. But while much discussion of pensions paints them in a nostalgic light, the reality of pensions for most people is far less rosy. Yes, it would be nice to be able to retire and continue being paid a nice salary for the rest of our lives. But the reality of pensions is not nearly as simple as people seem to imagine. Suggestions that 401(k) accounts should be killed off in favor of bringing back pensions would hurt far more people than they would help.
Special: IRA, 401(k) & TSP Scam
No Immediate Threat to 401(k) Plans
The threat to 401(k) plans seems to have been averted, at least for now. While some early reports stated that there were efforts underway to reduce the 401(k) contribution level to $2,400 per year from the current $18,000 per year in order to “pay for” tax cuts elsewhere, President Trump stated that there would be no changes to 401(k) plans in his tax reform plans. In fact, the limits for 401(k) contributions were just recently increased to $18,500 per year for 2018.
Over 55 million Americans have 401(k) accounts, with over $5 trillion in assets. Attempting to make such a drastic change to 401(k) accounts would have stirred up the wrath of tens of millions of voters, which is why President Trump chose to nip that proposal in the bud. But just because 401(k) accounts are safe for now doesn’t mean they will be safe in the future.
Proposals keep popping up in certain quarters to ease the federal government’s debt crisis by seizing 401(k) or IRA assets and forcibly converting their holdings into government debt. That would be an easy fix for the government, but disastrous for savers and retirees, so let’s hope those proposals never make it to fruition.
Retirement Requires Responsibility
Modern retirement planning is based on the understanding that being able to retire is premised on individuals being able to save and invest for their own retirements. Ultimately they are the only ones who can be relied upon to do what is right and best for their own retirement. Social Security payments and pensions plans are promises from others, but what happens when those promises are broken?
It’s well known that pension plans in the United States are in an abysmal condition. In order for pension plans to be successful, they have to estimate how long retirees will live in retirement, calculate how much money they will receive in retirement based on their expected future salary, then put aside and invest money today that will grow at a minimum average annual rate in order to fully fund those payments in the future.
If a company puts away too much money towards pension plans, it is harming its own operations by siphoning money into investment accounts that could have gone into growing the business. If it puts away too little money, it won’t have enough to pay its retirees, and that’s the state that most pensions find themselves in today.
Corporate pensions aren’t even the worst offenders in this regard. Public pensions are in even worse shape. But a universal common denominator of most underfunded pensions is that they are excessively optimistic about the growth rates their investments can achieve. Since the United States severed its last link to the gold standard in 1971, both the Dow Jones and S&P 500 have seen an average annual increase of 7.3%. That establishes a benchmark that most investors hope to replicate. Many pension funds, however, have much more optimistic outlooks, expecting growth rates of 8%.
Recent research has shown that most public pension plans operate under the assumption that they’ll achieve an average annual return of 7.6%, yet their average annual returns are only 5.7%. That two percentage point difference will compound over the years, resulting in billions of dollars of underfunding.
For public employees expected a fully-funded pension in retirement, they’ll probably be sorely disappointed once they retire and realize that they’re not going to get the full benefits they were promised. And because many pension plan employees probably haven’t saved enough to fully fund their retirement themselves, by the time they retire and realize they’re short of money it will be too late for them to reenter the workforce and continue earning enough money to support themselves in retirement.
Who Do You Trust?
The reality is that you can’t rely on other people’s promises for your retirement planning. If you want a comfortable retirement, you’re going to do have to plan and save for it yourself. That means availing yourself of every opportunity to save and invest. Pension plans and Social Security payments might make nice additions to your retirement income, but in all likelihood they won’t make up the bulk of it. Whether you choose to open a 401(k) account, an IRA, or some other sort of account, only your own savings will really ensure your retirement.
It’s worth pointing out, too, that since 1971 gold has outperformed stock markets, with an average annual growth rate of 7.7%. And with the development of gold IRAs, it’s easier than ever to make that investment in gold. Gold IRAs offer better long-term investment potential than stocks plus all the same tax advantages of traditional IRAs. You can even roll over funds from an existing 401(k) or IRA into a gold IRA. If you want to ensure that your retirement assets are well-protected, it’s well worth looking into making a gold IRA a part of your investment portfolio.