U.S. Pension Crisis

As the saying goes, “A smart man learns from his own mistakes, whereas a wise man learns from the mistakes of others.”

While the city of Detroit is learning a valuable lesson on how to run – or better still, how not to run – a city in the 21^st century, other American cities are looking on with keen interest that they may learn how to avoid following in its fate.

The scope of troubled municipalities is more widespread than most may realize. As Alan Mallach, a senior fellow at the Brookings Institution, warned to Bloomberg, “Every other industrial city has problems that could send them down the same path. … There are dozens, if not hundreds of cities that have similar issues.”

Just what are those issues? Falling tax revenues, degrading infrastructure in need of repair, slower emergency response times, poor future jobs prospects, and — perhaps the most troubling of all – pension commitments that have become too costly to burden.

Will pensions become a thing of the past? Or will higher municipal taxes become the thing of the future? What can you do to ensure your retirement needs are taken care of?

No Longer Sacred

After so many civil workers have dedicated their entire working lives to serving their cities and neighbors, they are suddenly finding their retirement plans under threat.

“Our members were promised certain things,” Tom Ryan, president of the Chicago firefighters’ union, defended to CNBC. “They enter dangerous situations every day. … People expect us to be there, and we are always there. We expect that the city holds up their end of the bargain when we signed on to be firefighters and paramedics.”

For years, municipalities were managing to fund their pension plans quite well. But the 2008-09 financial and housing crises derailed many of those plans. As jobs were lost and home values fell, so did property and sales tax revenues. Municipalities all across America began discovering serious pension funding shortfalls.

Within the last year, 34 states have failed to meet their annual pension funding requirements. In 17 of those states, benefit plans are at only 80% of their projected liabilities, while in nine states – Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky, and Illinois – plans are less than 60% funded.

With the recovery of lost jobs still slow and property values increasing in spurts, there are only so many ways cities can fix those funding gaps, none of which is attractive.

Selling more bonds requires a troubled municipality to offer higher interest rates, increasing the cost and postponing the solution. Slashing pensions and other benefits creates a backlash that drags out through the courts. And raising taxes and cutting civil services compounds the problem, as fed-up residents leave and tax revenues fall even further – as was so clearly illustrated in Detroit.

Pensions are becoming something of an antiquated notion, a “so-last-century” relic from which municipalities and large corporations alike are now trying to break free. For years, companies have eliminated their pension commitments by declaring bankruptcy and re-emerging with a leaner liabilities page; Hostess is a recent case in point.

If municipalities start doing that, it could trigger a chain reaction straight across the nation.

Call for a National Pension Plan

For this reason, many are calling on the federal government to structure a national pension plan with one set of investment rules, one accounting structure, and one set of criteria that any participating municipality would need to satisfy.

Any township wishing to join the program would be required to demonstrate that it has set its books in order in line with a national standard. Premiums per civil worker enrolled into the national plan would be invested in a nationally structured investment program, with profits distributed among all civil worker pensioners according to one nationally standardized benefits package.

Participating municipalities would no longer be left to go it alone, each one offering its own individual pension and benefits package, and each one left to fend for itself when something goes wrong. Rather, they would be part of an insurance-style national pension funding arrangement, where even a failing municipality would continue to receive payouts to its civil worker pensions.

Self-Control Goes a Long Way

But pension problems can be resolved and funding gaps closed even now, with great examples provided by at least seven states – Wisconsin, South Dakota, North Carolina, Washington, New York, Tennessee, and Delaware – whose pension commitments are more than 90% funded, despite sustaining serious hits to their economies like everyone else.

Financial analyst Meredith Whitney, CEO and founder of Meredith Whitney Advisory Group, tells CNBC how they did it:

“There are great stories about the cities and towns that are doing well, that are investing in key things and being mindful of their fiscal discipline.”

Investing and fiscal discipline. Pretty basic financial planning, isn’t it?

And that’s something each pensioner and future retiree should be doing on his own as well. Even if we believe our own pensions are safe, we owe it to ourselves to adopt our own personal plan of investing and fiscal discipline.

Finding a qualified financial planner is the first place to start. Ask him or her to help you find as many federal and state benefits as you may be entitled to. You’d be surprised at how many people end up leaving money on the table for not having looked more carefully for it.

Then, whatever benefits or pensions you find coming your way, invest with a risk profile in accordance with your age and working horizon. We know interest rates will have to rise eventually, so adjustable floating rate bond funds may be a valuable blend of solid dividend income and decent upside capital gains potential.

Stocks should be purchased at a comparable level of maturity as your own, so to speak. Where young companies with plenty of growth potential are great for young investors, mature companies paying generous dividends are better for mature investors who would benefit from extra income now more than they would from any longer-term future growth prospects.

Managing your personal budget is equally vital as a personal form of fiscal discipline. The sooner you start cutting useless expenses, the farther you will stretch your budget and pension earnings.

Watching your health and diet – aside from helping you feel great – can also help you reduce your medical expenses, which for some retirees can be costlier than even food and lodging. And for your own health’s sake, seriously consider quitting smoking. Not only would it spare you expensive and painful future treatments, but it can save you some $250 a month in smoking products even now.

By creating a professionally managed retirement investment plan of your own and holding yourself to some sound fiscal discipline, you won’t be as reliant on outside external sources of income which, as we are seeing, can be so easily jeopardized.

Yet when working out your plan for your retirement years, remember to work in a few perks. You deserve to enjoy your golden years, kick back your heels, and indulge yourself in a few luxuries. You’ve earned them!

Joseph Cafariello

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