DICK BAYNTON: Saving Private Income

Dick Baynton

Most U.S. citizens work hard and contribute to the economic well-being of their community, state and national economy. Most of us look forward to a productive career that rewards us with current income for food, shelter, clothing, recreation and education. Some of us arrive at a point in life when our earnings are substantial and we have savings that when added to other benefits allow us to retire comfortably. Most of us have working years of from 25 to more than 40 years to accumulate savings that, with interest, can support another 25 or more years of healthy existence.

Many retirees participated in Social Security payroll deductions that are sent to their bank accounts monthly. Railroad employees have special funding and private and public corporations often provide retirement plans. Government retirement benefits are the result of payroll deductions over the years as well. What happens when a private enterprise such as McClatchy Co. can’t afford to add to their pension cache for their retirees?

McClatchy is the third largest newspaper publisher in national circulation owning newspapers such as the Charlotte Observer, Kansas City Star, Miami Herald and Sacramento Bee. While the company has a $1.32 billion pension fund that pays pensions to 24,000 retirees, the 75-year-old fund is underfunded by $535 million and is unable to make its $124 million addition to the pension fund in 2020. The company is losing money like a lot of newspapers and its market value has declined more than 12%.

McClatchy turns to the PBGC, a government agency that is a fiduciary of corporate contributions and is thus a ‘pass-through’ agent to collect from private industry (not taxpayers) and distribute funds to retirees of companies who cannot sustain their ‘defined-benefit’ retirement financial obligations.

The Pension Benefit Guaranty Corporation (PBGC) is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA). While this agency may not be well-known by the general public, the PBGC is an independent federal agency overseen by the Department of Labor that was formed to encourage the continuation and maintenance of private-sector defined-benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum.

Note the two key words that define the problem, “defined benefit” for retirees. This means that some private-sector corporations and most government agencies offer “defined benefits” rather than “defined contributions.” The defined benefits were offered to attract workers based on the forecasts of actuaries, mathematicians and others who sat in front of crystal balls and ‘knew’ all about interest rate risk, economic growth and the perpetuity of retirement fund increases.

But ‘crystal balls’ are foggy and regional, national and international economies bounce around likes soap bubbles. Funds that were projected to yield 7% rates of interest fell to 2% to 4%; some even lower especially during the 2008 ‘securitized mortgage meltdown’ economic crisis.

The result is that our national debt is now $23 trillion, our federal retirement benefits are $7 trillion under water and state and local retirement liabilities stand at $4.4 trillion. This is important because it means that millions of retirees probably will not receive their planned benefits.

Federal employees currently receive as much as 50% higher retirement benefits as their private sector counterparts; this means that some of the income shortage for federal workers may be back-filled with substantial tax increases. However private sector retirees may start feeling the impact of Social Security funding shortages in the next few years.

On January 1st, 1980, a government savings plan identified as 401-k allowed workers to defer compensation from bonuses and stock options. Joint employer contributions and worker savings were ‘defined contribution’ and directly impacted by rises and falls in the economy and the stock market. However, the amount each participant saved was safe even though the investments weathered the ups and downs of investment securities.

In this environment, each of us needs to evaluate the present and future stability of our retirement savings and investments and make necessary adjustments acting on the advice of professional financial advisors.