Pensions and Social Security Benefits Could Change Over Time

April 12, 2016

This is the second article of a five-part series on navigating through the retirement income crisis.  Last week’s column focused on the retirement savings shortfall of Baby Boomers.  In this article, we’ll explore growing issues with two historically-reliable sources of income for seniors; pensions and Social Security.

Most pensions, especially state pension plans, are massively underfunded and in trouble.  The most recent (and conservative) estimate by the Pew Charitable Trust indicates that state pensions are underfunded by an aggregate $4 trillion as of 2013.  Worse, this figure doesn’t even include city and county pensions across the country.   As of 2013, PCTF cited Massachusetts as only 61% funded and Rhode Island at only 58% funded.  As most know, RI has taken steps over the past years to address the problem through pension reform, though it appears there’s still a large gap to fill.

There are many reasons for pension underfunding.  Chief among these are too-lofty investment return expectations (7.5%-8% annually), extended periods of insufficient annual contributions, (whether due to politics or low tax revenues) or not sufficiently calculating the long-term costs of the benefits promised in the past.  Extended lifespans have also played a role – Americans are living longer and drawing their pension benefits longer than the actuaries anticipated.

Solving this underfunding won’t be easy.  The extended and historically low-interest rate situation is making it hard for bonds to return anywhere near what was expected from the allocation of pension portfolios.  The average return of state pensions over the past 10 years was only 3.2% according to, and much of the upside was over the past six-year bull market, where the country hasn’t had a recession or major stock market downturn for eight years.  So “more stocks” may not be the answer.  Future pension recipients will not take kindly to reduced benefits, so higher taxes and further reform may be coming, as court ruling precedent seems to be favoring the pensioners who contest benefit reductions (CA and Illinois as recent examples).

The problems with future Social Security benefits have long been discussed, but Judgement Day may not be far away.  Entitlement spending (Social Security/Medicare/Medicaid) has reached 70% of the Federal budget and it is estimated that by 2030, the ratio of workers to Social Security recipients will drop from 4.5 (sustainable) to 2.5 (unsustainable).  The so-called Baby Boomer bulge to America’s senior demographic is just beginning and the problem isn’t being dealt with by the Federal government.  We saw slight reform to Social Security this year to disallow advantageous (file & suspend) claiming strategies.  Further changes could be in the form of reduced benefits based on high-income (means-testing), elimination of inflation increases (COLA’s), increases in the age for full benefits, higher taxes for all, and even full taxation of Social Security income itself (currently at 85%).

The key take-away is to be careful about basing your entire retirement on pensions and Social Security; you need to save as well to fill the probable gap that could result - from benefit changes and increased taxes - as the massive shortfalls within these traditional income sources could be a harsh reality for all.  Next week, we’ll look at some less-publicized money issues that Baby Boomers are facing.