The United States has a retirement crisis.
When it comes to saving for their retirement, Americans better hope they don't retire. Public-sector pensions are either running out of money or are at risk. But what we haven't focused on is the rising problem with private-sector pension funds. That is something we must address as well, or retirement security will wind up being nothing more than an oxymoron.
When people talk of pension problems, Social Security and public-sector pensions are what always come up. Social Security is still the major source of retirement income for millions of people. According to the Social Security Administration, 21 percent of married couples and 43 percent of single seniors rely on Social Security for 90 percent or more of their income.
Unfortunately, for the first time since 1982, Social Security will pay out more than it collects. It could stop being able to pay full benefits as early as 2034. Clearly, something must be done to put the system on better long-term footing.
As for state and local pensions, the funding shortfalls are estimated to be at least $1.4 trillion using the plans' expected returns — more if rational expected returns are used. Regardless, it is a lot of money. Locally, New Jersey has only 31 percent of the funds needed to pay its present and future recipients while Pennsylvania is at about 53 percent, according to the Pew Foundation. Delaware is in decent shape at 81 percent.
Hopefully, this failure of politicians to either raise the necessary revenues, make the required contributions to adequately fund the programs, or limit benefits will be debated during the upcoming election.
But what is not being discussed is the significant problems facing some private-sector pension plans.
There are two types of pension plans: defined contribution and defined benefits. The defined-contribution plans, which most of us know as 401(k)s, are owned by the worker. As such, they cannot be considered "underfunded," except that most workers will not have enough money when they retire. A study by the New School for Social Research determined that about 35 percent of retiring workers will find themselves in poverty.
The private-sector pension problems exist in what are called defined-benefits programs. Those are the traditional plans where a worker has been promised a certain monthly/annual payment at retirement.
One group at risk stands out: The multiemployer pension plans. These are "pensions sponsored by more than one employer and maintained as part of a collective-bargaining agreement." Many of the plans could become insolvent over the next 20 years.
So, why should we worry if that happens? It's called the "contagion effect."
Since a number of these plans are large, a collapse could cause the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures the benefits of private-sector pensions, to become insolvent. The government then would have to bail out the program and/or retirees would lose out significantly. The remaining private-sector retirement funds would lose their backstop.
But, it doesn't stop there. Businesses that are responsible for the plans may be required to help bail out the plans. The added costs could put them and their workers at risk.
What is Congress doing? A sixteen-member Joint Select Committee on Solvency of the Multiemployer Pension Plans (Rep. Donald Norcross of Camden is the local representative on it) was created with the requirement that it develop policy recommendations that will "significantly improve the solvency of multiemployer pension plans and the Pension Benefit Guaranty Corporation."
Their job is huge and must be completed soon. As a report from the committee states: "the insolvency of a large multiemployer defined-benefit plan would likely result in a substantial strain on PBGC's multiemployer insurance program." The PBGC projects its multiemployer program could become insolvent by 2025. There are about 10.1 million workers who fall under the umbrella of the pension plans, many of whom are in at-risk plans.
There are a variety of solutions to the private-sector pension problems. They are the same as the public sector and Social Security financial solutions: Either revenues would have to be increased and/or benefits reduced. Finding a political compromise will not be easy.