How to Cope With a Shrinking Pension

Here's what the fading prominence of private and public pensions means for you.

A 2014 survey found that 36 percent of workers have stashed away less than $1,000 in retirement savings and investments, making shrinking pensions an even more pronounced issue.

By Geoff Williams

For those who don't know, a pension is retirement money funded by an employer. You receive the money, either as a lump sum or in monthly installments for the rest of your life.

Many public pensions, funded by the government, are in the midst of reforms, and some fear that the financial promises made to workers won't be kept. In March, billionaire investor Warren Buffett wrote in his annual report to shareholders of Berkshire Hathaway Inc. that "during the next decade, you will read a lot of news – bad news – about public pension plans." He called them a "gigantic financial tapeworm."

[Read: How to Monitor Your Pension's Health.]

Private pensions, meanwhile, aren't looking robust, either. According to the Bureau of Labor Statistics, during the early 1990s, 35 percent of private industry employees were working for an employer that provided a pension. By 2011, the number had dropped to 18 percent.

Which begs a couple questions: Why are pensions struggling? And if you have one that looks as though it may be cut, what should you do?

Why pensions are struggling. Since 1875, when the American Express Company began offering the country's first pension, such plans have been part of the retirement landscape. Many people assumed it would always be that way.

"[It] was even used as a way to lure workers during World War II because of the labor shortage," says Kenneth Hoffman, managing director and partner at financial services firm HighTower HSW Advisors. "But, as financial markets became erratic and interest rates dropped, the cost of funding pension plans saddled those corporate balance sheets with enormous liabilities."

Hoffman adds that many of these large-scale defined benefit plans are disappearing because of the increasing popularity of products like the 401(k). "Corporations can now shift the responsibility from themselves to the employee," he says.

Many employees didn't mind taking on the responsibility. "Workers saw advantages in having 401(k)s with them as they moved from job to job," says Jean-Luc Bourdon, a personal financial specialist with BrightPath Wealth Planning in Santa Barbara, Calif.

Many lament the fading prominence of private and public pensions because the replacements – 401(k)s and individual retirement accounts – are not funding retirement the way your accountant or financial advisor would hope. That's because as a group, people aren't as disciplined about sinking money into retirement on their own.

[Read: How to Take Charge of Your 401(k).]

With a company pension, you get a stream of retirement income simply for coming to work and doing your job; your employer puts money into the pension. With a 401(k) or an IRA, you have to put some of your own skin in the game.

It's simply a riskier way to fund retirement. "Instead of the safe, lifelong pension system, the retiree now participates in a system that encourages exposure to the capital markets, which have experienced two market crashes within the past 14 years," says Gregory Gallo, co-founder of the Opus Group, LLC, a wealth management firm in Red Bank, N.J. "Now we are asking hardworking Americans, blue and white collar alike, who have worked and saved for their entire lives, to figure out their retirement themselves?"

It turns out that 36 percent of workers have less than $1,000 in retirement savings and investments, not including a house or defined benefit plans, according to a 2014 survey of 1,000 workers and 501 retirees by the Employee Benefit Research Institute and Greenwald & Associates.

What to do if your pension is shrinking. If you're living off a pension or you have a pension coming to you, the good news is that "it won't disappear 100 percent," Bourdon says. "I can't think of an instance where that's happened."

That's because if a pension plan does fall apart and can no longer fulfill its financial obligations, the Pension Benefit Guaranty Corporation will take over and pay your benefits. (There is a limit to what will be paid, however. In 2014, the maximum amount the PBGC will pay for a single-employer plan is $59,318.16 a year.)

While your pension may not disappear, it could be trimmed, tweaked and cut apart so that you don't receive as much as you planned. For instance, the city of Detroit recently put forth a proposal that if accepted by the bankruptcy court could cut Detroit workers’ monthly pension checks as much as 34 percent.

Cuts like that may not be so devastating if you're a decade or more away from retirement have some time to readjust.

"It's simple," Hoffman says. "Save more today, work longer or take more risk with your retirement savings. Since short-term interest rates have been near zero since the Great Recession, retiring baby boomers have not been able to get the returns from bonds that their parents were used to."

[See: 12 Surprising Facts About Boomer Retirement.]

But it isn't so simple if you're among those who have less than $1,000 squirreled away for retirement, or you're already retired and getting another job isn't an option. In that case, Bourdon says, "You may have to think about scaling back. The most significant adjustment with living expenses is usually with your house. You could sell and rent, or downsize to a smaller house, or rent a room in your house."

If you have considerably more than $1,000 saved for retirement, you may want to consider purchasing an annuity, says Aaron Brachman, a certified financial planner with RBC Wealth Management U.S.

And if you're able from a financial and health perspective, he says you should also consider taking Social Security later than you might have planned. "The longer you wait to draw upon Social Security, the higher your monthly payments will be, up until age 70," Brachman says.

He adds that buying an annuity and putting off Social Security are often shrewd financial decisions "even if you are not afraid that your pension will ever be reduced."

Source US News