Of all the bad financial surprises that can hit in retirement, learning a “guaranteed” pension could be severely cut is among the worst.
As the Treasury Department recently held a hearing on implementing a new law that allows pension cuts in troubled multi-employer pension plans covering about 10 million workers, Wisconsin retirees Bob Brockway and Bob Amsden tried to contemplate how they’ll respond when that day comes. They are members of one of the most financially strapped plans, the Central States Pension Fund.
Members of these plans could face cuts of 30 to 65 percent in their monthly pensions under the new federal law if their plans get close to insolvency and their fellow union members vote to approve the cuts to keep them from completely failing. The plans have been losing members as labor unions wane. Meanwhile, benefit obligations grow.
Brockway, 74, could potentially face smaller cuts because those over 75 at the time the reductions are made take smaller reductions. Retirees 80 and older are exempt.
Amsden, 63, has been delaying claiming Social Security benefits, living on his $3,000-a-month pension to qualify for his full Social Security benefit at age 66. He said he will have to abandon that plan if the cuts happen soon.
And being pushed into claiming Social Security early could be a six-figure hit to pensioners’ retirement, said Tim Wyman, managing partner with the Center for Financial Planning, an advisory firm in Southfield, Mich., with a substantial number of clients in union retirement plans.
“It’s absurd to think you can cut an existing retiree’s benefit like that and have them just continue on,” Wyman said. “Not only is the pension being cut but by taking their Social Security benefit early, that could be $150,000 or more over the course of retirement” that they will forgo over the rest of their lives by taking reduced benefits, he said.
Some experts say the changes are unlikely to spread to single-employer plans because those plans are better funded and carry higher federal insurance protection.
But the trend in pension freezes, where a company plan stops accruing benefits for current employees, continues. This fall, U.S. Steel Corp. and insurer American International Group said they will freeze plans at the end of the year.
And Pension Rights Center director Karen Ferguson said the retiree cuts in multi-employer plans establish a “dangerous precedent that could lay the foundation for cuts in earned pensions well beyond the multi-employer sphere.”
But they’re better than allowing the plans to completely fail, concludes Jean Paul Aubrey of the Center for Retirement Research at Boston College.
“There is a floor, so the people with the lowest benefits who are already close to the poverty level won’t see big cuts. We found that the system as a whole is better off with the cuts” because they sustain the plans, he said. “Because it’s unlikely the government will step in and save these plans, this is the next best thing.”
For future generations of retirees, Aubrey is heartened by several states’ plans to begin requiring employers without 401(k) plans to offer workplace-based IRAs.
The accounts would automatically enroll employees with a default payroll deduction into the savings plans.
Workers would have to fund the plans without help from their employers, and there would be no guarantees on how much income the accounts would generate in retirement, but workers would at least know that from the start rather than being surprised down the road.