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Is Your Pension Not Going to Make Its Full Payment?


Though pensions are far from the biggest part of the American retirement system — self-funded workplace plans like 401(k) and 403(b) plans make up the majority, with individual retirement plans also popular — there are still plenty of people who rely on their pensions to live in retirement. Most of them work in the public sector, though some bigger legacy firms in the private sector still have pensions as well.

Public pensions could be in line to see a major decline this year, though — the biggest since the financial crisis hit in 2008. This is a serious issue for workers who are relying on their pension payments to fund their retirement plans.

For more help with retirement planning, including figuring out how a troubled pension may impact your need to save, consider working with a financial advisor.

Pension Basics

A pension is a type of retirement plan known as a defined benefit plan. This means that you receive a payment in retirement based on your years of service at a company and the amount of money you earned while there. This is in contract to a defined contribution plan, where you choose how much money to put into your plan and then take that money in retirement. The most common types of DC plans are 401(k) and 403(b) plans.

In a pension plan, the company puts money aside for an employee who is eligible for a pension and invests it to grow over time. When retirement comes, employees often have a choice of either taking a lump sum — which they can then invest as they choose — or regular payments for the rest of their life in the form of an annuity. Some pension plans also cover a person’s family after the worker’s death.

Pension plans were much more popular in the 20th century, but have largely fallen out of favor as 401(k) plans gained popularity. DC plans are much less of a burden on companies. Public employees such as teachers, police officers, firefighters and government employees, though, still generally have access to a pension plan.

What’s Going on With Public Pensions?

SmartAsset: Is Your Pension Not Going to Make Its Full Payment?

The money that a company sets aside for pensions doesn’t just sit there; it’s invested in the stock market to grow and allow for all the payments required down the road. With the economy not doing well and the stock market down significantly this year, that spells trouble for public pensions.

According to reporting from MarketWatch, the aggregate funded ratio could fall from 84.8% to 77.9% this year. That means that previously, 84.8% of pension obligations were currently able to be met, while by the end of this year it will have fallen to 77.9%. Generally, a healthy pension is one that is funded at least 80%. Unfunded liabilities were less than $1 trillion before 2022, but by the end of the year that number may rise to $1.4 trillion.

This isn’t an entirely new phenomenon, though. Only 17 states had a pension system funded between 90% and 100% in 2021. Projections say that could fall to just seven states in 2022.

Much of this comes down to market returns. In 2021, the average market return for pension plans was 25.3%. In 2022 the average market return could actually be negative 10.4%, meaning plans are losing 10% of their value on average.

Inflation, of course, is also a major issue for pensioners. With a defined benefit plan, your benefit is based on a formula involving how long you worked and what your salary was while working. If inflation continues to go up as it has recently, that money will be worth significantly less in retirement. This, of course, impacts all retirees, but while 401(k) savers can in theory adjust their savings and investment strategies to create more money for retirement, pensioners cannot.

Bottom Line

SmartAsset: Is Your Pension Not Going to Make Its Full Payment?

Pensions are a mostly outdated method of funding retirement for workers, but for those that still have them — mostly public employees — they are vital. An already shaky system, though, has taken a major hit thanks to the market downturn and economic volatility of the past year. Pensions will likely have a negative market return on aggregate this year, and the number of plans that are close to fully funded is expected to fall.

Retirement Planning Tips

  • For help planning your retirement, consider working with a financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If, like most people, you don’t have a pension, find another away to plan your retirement. If you have access to a workplace retirement plan like a 401(k), make sure you use it — and take advantage of any employer match that is available.

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