About Those “Guaranteed” Retirement Benefits

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I continue to get a lot of feedback on my recent columns about Social Security.

While some of you get what I’m saying — and are painfully aware of just how real the risks are — a number of responses suggest that many people still fail to recognize just how shaky many old-line retirement plans … including Social Security … are.

Now, before I go any further, let me make a couple things abundantly clear: My goal here is not to scare anyone just for fun. Nor am I making arguments on the behalf of either major political party.

Rather, I write about these issues because I want to give you the unbiased information you need to make better financial decisions. And I describe the worst-case scenarios because THOSE are precisely the possibilities that you need to plan for.

Like you, I hope these worst-case scenarios never come true. But I believe the only way to avoid them is by educating as many people as I can about just how grave the potential dangers actually are.

For example, a reader named Raquel wrote in to say that “S.S. has funds till 2037” so we needn’t worry.

Well, Raquel … on one hand, you’re right: Based on current official projections, the Social Security fund will be solvent until 2037.

However, those projections have been worsening on a rather consistent basis. So at this point and without alterations to the program, the 2037 date is a pipedream.

Moreover, that figure does NOT mean we have thirty-odd years’ worth of benefit payments just sitting in the Social Security trust fund waiting to be sent out.

Quite to the contrary: The Social Security trust fund currently contains enough money to cover only about three years of future benefit payments. The rest of the money going out is coming from current contributions.

Plus, as I’ve noted before, the Social Security fund is currently paying out MORE in benefits than it is collecting … again, far sooner than was recently projected.

What about the idea that Social Security funds are somehow separate from the rest of our nation’s fiscal mess?

In theory, they should be. But in reality, and despite some politicians’ insistence to the contrary, there is no “lockbox” on those funds. Washington has borrowed from the program quite heavily already, in fact.

Perhaps the most important point I can make is this: Congress can radically alter — or completely discontinue — the Social Security program at any time. If you don’t believe that, I encourage you to read the 1935 Social Security Act!

It clearly states that “The right to alter, amend, or repeal any provision of this Act is hereby reserved to Congress.” This notion was upheld by the U.S. Supreme Court’s decision in Flemming v. Nestor back in 1960, too.

Am I saying that Congress will do away with Social Security? No. It would be political suicide and would likely lead to actual violence in the streets.

My point is simply that nothing about Social Security is guaranteed at all. Nothing.

The contributions that we’ve personally made — or are still making — are going right back out the door to pay current benefits to someone else. There are no accounts with our names on them. Nor does anything ensure that future money will be paid to anyone — regardless of age, income, or past contribution history.

This Idea of “No Contractual Obligations” Was Recently Upheld
In Two Separate State Pension Court Cases, Too …

Last September, I wrote a column about state pension plans that were trying to renege on promised benefits.

The basic idea was that Minnesota, Colorado and South Dakota were all arguing in court that they had the right to alter the terms of their pension plans — including benefits promised to CURRENT retirees.

As one Attorney General put it then: “There is no contract here, express or implied.”

Well, guess what? Two of those cases were recently resolved … and in both instances, the courts sided with the pension plans!

On June 29, District Court Judge Gregg Johnson agreed that changes made in Minnesota’s 2009 and 2010 pension reform laws were constitutional — including changes to the pensions’ formula for cost-of-living increases.

According to Judge Johnson, the changes are a “reasonable response to a fiscal threat that jeopardized the long-term interests of Plan members, the State, and the State’s taxpayers.”

Meanwhile, on the same day in Colorado, Denver District Judge Robert Hyatt dismissed a lawsuit that challenged reforms being made to that state’s plan, too.

Oh, and you might not have seen this little tidbit, but for the first time in history, the U.S. Postal Service is going to stop making prepayments into its Federal Employees Retirement System.

Now, that particular fund supposedly contains a surplus of nearly $7 billion at the moment. But the Post Office’s underlying business model is anything but stable right now. Let’s not ignore the fact that these prepayments are federally mandated, either!

Could this be yet another major public retirement plan that’s doomed to fail down the line? I sure think so.

So by all means, let’s hope for the best. But let’s also recognize that there are practically no guarantees in retirement anymore … and that it will take serious changes and universal sacrifices before any of the current public systems are sustainable for future decades.

Best wishes,

Nilus Mattive
Money and Markets

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