The end of a tradition? Traditional pensions plans on their way out

In the summer of 2012, General Motors offered many of its employees the opportunity to receive a lump sum payment in lieu of a monthly pension check. After crunching the numbers for a retiree client and highlighting both the pros and cons of taking the lump sum, my client chose to continue with the traditional pension format.

In fact, more than half of those who were offered the choice in 2012 selected to remain with the pension format. Clearly then, this particular retiree’s decision was not unusual. It was actually the majority decision.

My intent is not to say that my client’s decision was right or wrong. What has remained in my thoughts, though, was his reasoning for turning down the lump sum and continuing with the monthly pension.

His rationale for staying with a pension was simply that he is a traditionalist. Now, there’s certainly nothing wrong with being a traditionalist.

But, as with so many things in our world these days, traditions are changing. Traditional pension plans that pay a lifetime of income along with a survivor’s benefit are disappearing fast.

There are a number of reasons why. One, of course, is that retirees are living so much longer than was the norm just a few decades ago. Another is the scary reality that many pension plans, public and private alike, are underfunded.

Unfortunately, word of the many pension crises our nation is facing rarely makes it into the headlines. But it’s a fact that there are a great number of public pension plans that are fast approaching crisis level. They just don’t have enough funds in their coffers to fulfil their pension obligations.

We all followed the city of Detroit’s bankruptcy proceedings. One of the key issues that needed to be resolved before bankruptcy was approved was how to settle the pension situation with retired city employees.

From coast to coast, there are state and municipal pensions that are terribly underfunded. In New York City alone there are more police officers collecting pensions than there are active police officers on the street.

In corporate America, 41 million employees and retirees have the comfort of knowing their pension is protected by the Pension Benefit Guaranty Corporation (PBGC). There are currently 10 million Americans whose pensions have already failed and their pensions are now handled by the PBGC.

That being said, what concerns me is that the PBGC itself is underfunded. It has a deficit of $62 billion. Signed into law by President Ford, the PBGC has run a shortfall for the past 12 consecutive years.

I believe that the traditional pension is on its way out. Not only is the writing on the wall, I think you could say that the wall is collapsing. I don’t see how public and corporate pension plans can meet their pension obligations.

Traditions do change. It used to be that department stores were closed on Thanksgiving Day and all the College Bowl games were played on New Years Day.

What I’m saying is don’t stay with your pension just because it’s “traditional.” If you have a lump sum offer, review it and analyze it. The world of a gold watch at retirement and a traditional pension is near extinction. The only constant in our ever-changing world is change.