Counting on that Social Security? Pension? Think again
By Cynthia Flash
Special to The Seattle Times
Want to be secure in your retirement planning? When you calculate what you need, assume you'll get less than you expect from both the government and your employer.
Conventional retirement planning says that you can draw on three sources for retirement income: Social Security, a pension and your savings.
But today you'd be smarter not to rely on the projected payout numbers from Social Security or a company pension fund, especially if your retirement date is years away.
Best advice: Depend more on what you can save on your own.
Here's what you can and can't count on and how you can take care of yourself:
Shrinking Social Security
Benefits will likely shrink in the future as the number of recipients outpaces the number of workers. Today there are 3.4 workers paying into the system for each Social Security beneficiary. By 2030 the year the youngest of the baby boomers turn 66 that number will decrease to 2.1 workers for each beneficiary.
In addition, the cost of Medicare, Medicaid and supplemental health insurance keeps rising and taking a bigger bite out of those Social Security paychecks.
With all the recent changes, benefits offered by Social Security, Medicare and Medicaid will continue to evolve, impacting people differently depending on their ages and financial situations. The trend, however, is toward reduction.
"My opinion is you will get something from the government, but it will probably be less than stated," said Henry "Bud" Hebeler, a former Boeing president who currently runs a retirement-planning Web site: www.analyzenow.com
What you can do
To be safe budget assuming stingier government benefits.
'Guess-timate' pension projections
Even aside from the pension-fund shortfall question, workers depend too much on employers' projections of how much they can expect in pension payouts, Hebeler warns.
The projections are only guesses, based on assumptions that workers will be with the company their entire careers and will receive annual raises.
"When companies make a forecast, they assume a certain percentage increase in your wages," he said. "If you don't work that long, the amount goes down very rapidly because you're reducing the number of years and wages assumed."
What you can do
Find out your company's forecasting formula and how it applies to you. For example, if pension projections are based on yearly 4 percent raises and 20 years of employment, and you don't meet or you exceed those figures, adjust accordingly.
Problem pension funds
More than 60 percent of the companies in the Standard & Poor's 500 have underfunded pension plans, according to a recent Credit Suisse First Boston study. Latest to make headlines: Kaiser Aluminum, which cited its underfunded pension plan in asking a court to free it from having to pay its retirees promised medical and pension benefits.
At the end of 2002, Boeing had the fourth-biggest pension deficit, behind General Motors, Ford Motor, and Exxon Mobil. Credit Suisse First Boston analyst David Zion estimated Boeing's pension plan was $7.14 billion short and that the shortfall would grow to $10.7 billion this year.
While this may sound alarming, it should concern workers only if their company fails as did Enron, for example.
At that point, they'd have to rely on the government's increasingly overburdened pension-insurance company to bail them out in part.
The government doesn't guarantee it will give employees what their employer promised. Instead, it pays only a fraction, based on when the employee and the company were terminated, never to exceed $40,000 a year.
What you can do
Some companies report the health of pension plans to shareholders. However, sometimes the information is buried or obscure. The best thing individuals can do is ask their human-resources department about the health of their company's retirement fund and keep an ear out for news reports that raise red flags.
No pension at all
Employers are moving away from traditional pension plans, or "defined benefit" plans, and toward "defined contribution" plans, which are the tax-deferred 401(k) and 403(b) plans (the latter only for employees of nonprofit tax-exempt employers) that encourage workers to save on their own.
According to the U.S. Labor Department's Pension and Welfare Benefits Administration, the number of defined-benefit plans declined from 175,000 to 56,400 between 1983 and 1998.
Companies are putting the onus on the individual.
What you can do
Take full advantage of these tax-deferred plans. And save.
Seattle lawyer Norm Milks helps companies set up employee-retirement plans. His advice, based on 25 years in the business:
"You shouldn't count on someone else taking care of you. Find out what your employer is really doing for you. It's all about taking some control over your own future. You can't just sit back and say Social Security is going to take care of me. Similarly, you can't sit back and say an employer will take care of me forever."