Will your retirement need a bailout, too?
In late 2022, the Biden administration announced $36 billion in COVID-19 money would go to Teamster union pensions in the Midwest and Texas. The Central States Pension Fund (CSPF) is the largest and most troubled of the union (multi-employer) pension funds. The cost is about $100,000 per retiree and now each teamster will receive their full pension instead of the half or so they might have gotten without the bailout.
One hundred thousand per person seems like a lot! The median 401(k) balance (per person, not household) for individuals 55-65 is about $165,000–and that’s almost certainly not enough. It takes hundreds of thousands to fund a retirement, so I'm not surprised at the costs. I described that more in this blog here.
Why did this happen? The CSPF has a history of corruption that dates back to Jimmy Hoffa. It would be tempting to assume that the cause was mismanagement and malfeasance. It’s not that simple. The CSPF was severely damaged by Reagan-era trucking industry deregulation, early Federal regulations that discouraged adequate pension funding, and a very flawed 2007 deal with UPS. Interestingly, because of the historical ties with organized crime, the CSPF was banned from doing their own investing. The federal government appointed Wall Street banks to oversee the investments.
I don’t have to tell you that appointing Wall Street banks to oversee big money is asking for trouble. Elliot Smith wrote about the CSPF in 2018 and stated, “while the investment losses are not the source of the retirement plan’s unsustainability today, they accelerated the pension’s problems, and almost certainly made the benefits cuts deeper. The ‘professionals’ made more money disappear in a shorter period of time than the mobsters ever dreamed of.”
Pension funds are troubled and need fixing. Wall Street, bad regulations, short-term thinking, and mismanagement play a big role. But let’s not assume it’s easy to run a pension. Pensions have the same huge issue you do with your own retirement plan. It’s the number one worry of my clients and the primary reason people seek a financial planner.
No one knows with any confidence or precision how much we need to save for retirement.
Why is it so important to know how much we need to save for retirement? We pay a very high price (our time and stress) to acquire money through continued employment. Saving too much has seriously negative consequences as we’ve talked about before. Why trade so much of your precious life for savings you don’t need? But of course, saving too little has even worse consequences--outliving your money and depending solely on Social Security in your most vulnerable years.
Why is it so hard? Several unknowable variables make the math difficult. The biggest is longevity. If we knew the date of our own deaths, we would have a much better sense of the amount to save. The second is inflation. One needs to fund retirement expenses not in (nominal) dollars but in (real) purchasing power. Inflation can wreck a pension plan or a retirement fund. The third is the stock market which is needed for the higher investment returns. But the stock market has real risk and can seriously backfire on us.
Pensions have the theoretical benefit of combining many people together, but in some ways that also makes them more complicated. Yes, they should be run better, but retirement funding is an extraordinarily difficult thing to solve.
Most likely you would not be reading this blog, or I even in business, if funding retirement weren’t such an unknowable challenge. It is the preeminent financial issue of our time.
