As the baby boom generation moves toward retirement, and by definition will start to draw from their retirement assets, some significant financial problems loom.
First, since almost everyone is covered by Social Security, we all have a stake in that system. For years Social Security has existed because it takes in more money than it pays to retirees. So it functions on current cash flow while any excess goes into special U.S. government bonds to be redeemed later.
The catch is that the government has already spent the money and simply promises to pay later. With the current federal budget situation, this situation could change soon and should cause all of us some concern.
Numerous state and municipal pension systems are woefully underfunded, and not just a little bit.
Some examples are the state employee and teachers pensions for West Virginia and Louisiana. In California, San Diego and Orange County have had funding problems for years. A few years ago, one county in Alabama ran out of money and simply stopped paying pensions. The state has not helped so all those retirees simply lost that source of income. We are also seeing a grave example in Detroit where many stakeholders besides the pensioners are at risk.
There is no easy or painless way to solve this dilemma.
We have reasonably good pension systems in California but they have some problems too, just not as bad as elsewhere. The Public Employees’ Retirement System has been investigated several times for investment “irregularities.”
Clearly the unsettling part is what the future holds for the retirees of any plan that exhausts its money, like that county in Alabama. What do those people do who have reasonably expected to have a pension? For private pensions, the government has an insurance program that takes over failed private pensions, but that agency has its own funding problems.
Europe has provided some examples that are truly distressing.
Governments there seem to view the retirement savings of citizens as a convenient source of revenue since they do not want to reduce spending or allow privatization. Most European pensions are state plans so the government has easy access. Here are some frightening examples:
It looks like although the governments are able to enforce general participation in pension schemes, they do not seem to be the best guardians of the money accumulated there.
This is serious! We, too, should be watchful and clear with our government about what they should and should not do with our money.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him at firstname.lastname@example.org.