The Pension Pinch or The War of the Ages?

Some years ago I read a pamphlet entitled The Pension Idea (Amazon says it is out of print, but you can find it by searching elsewhere) wherein the author pointed out the dubious origins, purposes and sustainability of pensions. I acknowledged the wisdom of his assessment, but didn't think it had much practical applicability to our time since most companies were not offering pensions anymore, but 401(k)s. Foolishly I forgot about governments at all levels which are both the largest employers and the largest PENSIONERS in our country.

So flash forward to October, 2010, and reports such as these:

11 State Pension Funds that May Run Out of Money

or

Growing Wave of Pension Shortfalls Threatens Local Governments

and The Pension Idea comes back with a vengeance.

In a nutshell, the pension idea is that you can NOT rely on anyone or anything else (especially the government) to support you in your old age. Not the government, not the new workers, not the market, not dividends or profits and, sadly, not the company that you worked for all those 30+ years.

Why? The simple answer is that we are talking about the future and who can predict the future with any certainty. The more sublime answer lies in the faultiness of the economics underlying "the pension idea," namely that the pensioners are going to have a large (and ultimately unattainable) claim (both legal and moral) on the profits of private companies and the tax revenues of public entities. And when the pensioners demand their money and the workers won't supply it and when the government can not "fix" it...well, take a look at what is happening in France right now!

However, the author of The Pension Idea was too right, too soon. He wrote in the 1950s and thought that any recession would show the weakness of private company pensions. What he failed to realize (at least by my recollection of the book) is that Uncle Sam would step in and "save" the pensions. This they did, but did it "save" anything?

In fact, no. Now we have all of the pension shortfalls settling on the Pension Benefit Guarantee Corporation (which itself is broke), which is nothing more than the taxpayer. And the coming war will be between the pensioner, who has a valid legal and moral claim to payments, demanding money from current, working taxpayers who are having difficulty meeting their own bills, much less their tax burdens for current government programs and now the livelihood of every worker who went before them.

I am afraid the day of reckoning is going to be sooner rather than later and all because of a false "pension idea" that originated less than 3 generations ago. So what can you do?

• If you are currently receiving a pension (or about to elect one) and can take a "lump sum" payment, I would do so notwithstanding the extremely adverse tax consequences. Of course, seek out competent, professional advice to help you mitigate the damage if possible.
• If you are working for a company or governmental body that offers a pension which you are enrolled in, see if you have a vesting schedule. If you are currently vested with benefits, cease contributions to the pension plan and direct that money to other investments.
• Finally, these "other investments" ought to include family businesses or some other personally-controlled PRODUCTIVE enterprise.

After all, it was families and family businesses who were the ones who took care of their elders before the "pension idea" destroyed that ethic. Let's be the ones who resurrect it!

Finally, those who plan on retiring on the market via their 401(k)s and IRAs ought to seriously reconsider that program as well. Just what do you think is going to happen to the value of stocks and bonds when the Fortune 500 and all governmental bodies admit they are broke? True diversification is the key, which I have outlined here before.