What Will You Do If Your Pension Fund Isn't There For You?
Millions of Americans are counting on pension benefits that were promised based on financial projections that have not, and in many cases cannot, materialize. The crisis in underfunded pension funds is not a future problem — it's a present one.
How the Promises Were Made
The period from 1980 to 2000 — "The Roaring Twenty" — produced extraordinary market returns with unusually low volatility. Corporations and government entities made long-term pension promises assuming that kind of performance was the new normal. Plans were designed around 7% or higher annual growth assumptions.
Then the 2000s arrived. The tech bubble burst in 2000. The financial crisis hit in 2007–2009. The smooth, consistent returns that the pension math required simply didn't materialize.
The Math Is Unforgiving
Here's the part that most pension stakeholders — employers and employees alike — didn't fully appreciate: when you miss a year of growth at your target rate, it doesn't take one good year to catch up. It takes more than two. Compounding is multiplicative, not additive.
If a pension fund needs 7% growth and earns 0% in year one, year two requires 14.49% growth — not 14% — just to achieve the long-run average. Each missed year raises the bar for recovery higher than the year before.
By 2016, if pension funds had achieved their assumed 7% returns from the year 2000, the Dow would have needed to be above 33,000 and the S&P above 3,800. Actual levels at that time were 19,762 and 2,238 respectively. The gap between promised and delivered was enormous — and it has been closing in the wrong direction.
What You Should Do
- Investigate the actual funding status of any pension you're counting on — corporate or government
- Review your own retirement projections for assumptions that may not hold
- Consider building alternative income streams that don't depend on either market performance or pension promises
- Take seriously the concept of a "private pension" — a strategy that provides guaranteed, predictable income that you control
Whole life insurance and properly structured savings strategies can function as private pensions — income sources that don't depend on the market being at the right place when you need the money, or on an institution keeping promises made decades ago.