President's Blog - Investigating the Pension Problem

1/1/2018

The popular and unpleasant story we are often told about Americans and their financial preparation for retirement is that very few are – prepared financially, that is.

The truth is a little less dramatic, depending on how you look at it.

According to the Federal Reserve’s Survey of Consumer Finance from 2013, 53 percent of American households supported financially by a member between the ages of 55 to 64 had savings in some form of retirement account. That, of course, would suggest that 47 percent do not have savings put away in an account aimed at reducing tax hits when the money is disbursed during retirement.

That does not mean those people don’t have savings accounts. It means they do not have money in 401(k)s or IRAs.

Of that 53 percent with a retirement account, a great many have retirement funds in either private or public pension funds. It is estimated that 22 million Americans work for federal, state or local governmental bodies and most of them have traditional public pensions.

In the private sector, the use of traditional pensions have shrunk to the point where only 13 percent of private sector workers participate in a defined benefit pension. There are also many more who are already out of the workplace and enjoying the benefits of having participated in a pension while they were working.

This imbalance between pensioner perceptions and pension realities comes to light in Spectrem’s new study Tensions with Pensions: An Analysis of Public Pension Fund Members’ Knowledge and Sentiment About How Their Money is being Invested.

The Spectrem study is based on an online survey of public pension fund members across the country, including, among others, those in public pension funds in California, New York, Florida, Missouri and Texas.

The study is extensive and all-encompassing, considering not only the funding numbers for public pensions but also the manner in which public pension funds are invested and the disconnect between the returns funds get on investments and what investors believe the return on investment is for their pension.

The key takeaway is that a significant majority of public pension fund members think their pensions are fully funded and their pension disbursements are not challenged by underfunding, when in fact public pensions are not fully funded.

For example, 80 percent of NYC Fund members believe their pension is fully funded, when in fact the fund is only approximately 68 percent funded. There is a similar undue optimism among pensioners in the NYC fund regarding return on investment; almost half believe their fund has outperformed the market when in fact the returns have been well below market revenues.

The study reports that pension fund members, on average, expect their pension to cover half of their retirement costs over time. Advisors working with investors who are depending on their pensions need to help those investors determine if that pension is indeed going to be as supportive of their income requirements in retirement as they think.

The pension study reiterates a well-known fact about investors; many of them do not know the details of their retirement funding plans. Advisors who provide guidance in understanding the depth, or shallowness, of an investors’ retirement portfolio could benefit just as much as the investor will benefit from that guidance.