Many economists view underfunded pensions as one of the biggest threats to the nation's fiscal health. Two key votes in California yesterday show how public sentiment is leaning toward cutting costs, even if it means taking away previously promised pension benefits:
In San Jose, voters approved a measure that will require public employees to make a tough choice: Either make greater contributions toward their own retirement, or receive less generous benefits.
San Diego voters supported a similar ballot proposal that will cut benefits and impose new limits on pensions for government workers.
But Will It Stick?
Even after the voters have spoken, pension cuts aren't a done deal.
Unions plan to file suit to block the cuts, arguing that workers relied on present benefit levels when they chose to accept their jobs. Previous court cases have typically supported the idea that employers aren't allowed to impose pension benefit cuts on current workers without offering some other type of benefit in exchange.
Private workers have the express protection of the federal law known as ERISA, which prevents private companies from going back on pension-related promises they made to their employees. But ERISA doesn't generally apply to public pensions, arguably giving state and local governments a greater ability to cut pension benefits.
There's no doubt, though, that both private companies and public employers have the right to cut benefits for futureworkers. For decades, the trend in both the public and private sectors has been to make workers increasingly responsible for their own retirement savings, with most employers switching away from traditional pensions and toward 401(k) plans that put the onus on workers to make retirement contributions.
The real problem, though, is that the benefits already promised to currentworkers are behind the potential fiscal catastrophe of public pensions.
The Big Retirement Myth: You'll Spend Less
The Battle Over Public Pensions Heats Up With Two Calif. Votes
There's a persistent assumption going around about what happens after one retires: Pundits, financial planners and even retirees often claim that your spending shrinks after you leave the 9-to-5 world.
Sure, your house may be paid off by then, and you may be able to ditch the expenses of commuting and buying clothes for work. That's not the full picture, though.
In good and not-so-good ways, many people end up spending more than they expect during their golden years.
For lots of folks, retirement means finally getting around to doing things you've been putting off for years. And those things cost money.
You may finally do some traveling in Europe, for example, or explore the U.S. in an RV. Want to get serious about your love for curling? Joining a league costs some money. Looking forward to overhauling the garden or taking up woodworking? That'll cost you, too. Even just traveling to visit and spend time with the grandkids can add up -- in travel costs, dinners to treat the family, and gifts and ice creams for the young ones.
Of course, you don't have to bear these costs. You can let the children and grandchildren come to you and can spend more time in public libraries than on golf courses. But the early years of retirement, in particular, are when folks tend to have significant energy and lots of plans.
Unfortunately, many expenses in retirement are not so discretionary.
Health care, for example, can take a huge bite out of your nest egg. Fidelity Investments recently estimated that a 65-year-old couple retiring today can expect to pay, on average, about $230,000 on health care. That's just an average, so you might spend far less -- but you could also spend much more.
Medicare probably won't provide sufficient coverage, so you might need to buy supplemental insurance, which isn't usually cheap.
Meanwhile, though a lower income level will probably mean your income taxes will decrease, you'll still be on the hook for property taxes. And those will probably keep growing over time. If your annual property tax is $3,000 and it grows at 3% each year, it will hit $5,400 in 20 years.
Your home insurance costs will rise, too, along with your car insurance premiums, the cost of heating and cooling your home, groceries, and most other items.
And finally, whereas you might expect retirement to be a time when you're no longer raising children and supporting those dependents, you might still find yourself occasionally -- or routinely -- helping your loved ones out financially.
Still, the news isn't all bad. While you might spend more than you expected to once you retire, you probably won't keep it up. As we move into and then out of our 70s, people tend to slow down and be less active. Less travel, less eating out, and fewer hobbies can mean lower spending.
Throughout most of our retirement, we'll enjoy discounts on various expenses, too, such as movie tickets, meals, and even property taxes.
What to do
Don't let your retirement plan end up designed by assumptions you never questioned. Take some time to map out what your expenses may be in retirement, and to make sure you're saving, investing, and accumulating enough to support them.
Another possibility is working part-time through part of your retirement, which can add income and possibly some useful benefits as well. It also keeps many retirees happier, giving them a social setting to belong to. Downsizing to a smaller home or moving to a less costly town or region can also make a difference.
Spend some time planning now, and you'll thank yourself later.