Broken Promises: 10 Financial Coping Strategies for Future

Financial Security

Barbara O’Neill

Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

Workshop Objective

• Help employees deal with the financial aftermath of “broken promises”

– Income losses

– Benefit reductions

• Presented as a AAFCS Webinar and to several employee groups in NJ

• Participants asked to “check their anger at the door”

– Focus is on solutions; not confrontation or complaining about losses

Polling Question: How Many of You Have Experienced

“Broken Promises?”

Workers can’t even count on income and benefits promised in their CURRENT labor contract, not to mention promises made years ago when they were first hired.

What’s Happening?

Era of Broken Promises

• Terminated pensions

• “Church plan” pension exemptions from ERISA

• Suspended 401(k) matches

• Salary cuts and freezes

• Furloughs

• Benefit cuts

• Pension COLA cuts

• Others

Key Themes During Past Few Years

Peggy Noonan reply to question from Maria Bartiromo about “game-changing events during 2011” on Wall Street Journal Report, 1/1/12

“The fall of structures that we’ve come to rely on” and “Lots of insecurity”

6

New York Governor Andrew Cuomo, 12/16/11 interview about streamlining government, including new pension benefit tiers:

“the whole system was designed at a different time and a different place and it needs serious reorganization.”

More Evidence of Broken Promises

7

The “New Normal” is Exacerbating Broken Promises

8

For Some, the Dream of Upward Mobility is Slipping Away

9

While recent media reports have covered angry protests directed at public employees whose pension and health benefit packages lasted longer than most in the private sector…

…the REAL ISSUE is that workers in both the public and private sector have lost critical pillars of financial planning support that they once thought they could count on!

The Real Cause of All the Anger

10

• Increasing numbers of public (and private) sector job benefits have been overhauled

– Employers realizing previously-promised benefits are unsustainable and/or unaffordable

– Politically popular to slash public employee benefits

• More than half of public pensions are <80% funded

– < 80% level deemed “substantially underfunded”

• Defined benefit (DB) pension formulas and COLAs especially under attack

“Broken Promises” Trends

11

• Lower benefit tiers for new hires

• Retirement ages raised (e.g., 55 to 60, 62 to 65)

• Automatic COLAs eliminated or scaled back

• COLAs tied to pension plan performance

• Changes in pension benefit formulas

– Elimination of “sick day” bonuses

– Change from “High 3” average salary formula to “High 5”

Frequent Pension Plan Changes

12

• “High Three” Average Formula (Current Tier 1 and 2)

– Years of Service/55 x Final Average Salary

– 35/55 x $60,000 = $38,181 annual pension ($3,181/month)

• “High Five” Average Formula

– Years of Service/55 x Final Average Salary

– 35/55 x $52,000 = $33,090 annual pension ($2,758/month)

• Difference of > $5,000/year and $423/month

• See http://www.state.nj.us/treasury/pensions/estimate.shtml

Case Example: New Jersey PERS

13

• Workers’ coverage is decreasing and/or they are increasingly paying more for:

– Premiums

– Deductibles

– Co-payments

• From 2000 to 2010, average premiums for family coverage through an employer increased 114%

• More employees’ ONLY option is high-deductible health insurance

Health Benefit Challenges

14

• Percentage of workers enrolled in high-deductible health plans quadrupled from 2006 to 2011.

• Often called “consumer-driven health plans”

• Encourages consumers to be more conscious of medical-care costs; comparison shopping is difficult

• 2011 quote from health insurance company CEO: “It’s safe to say we expect enrollment in consumer-driven health plans to continue to grow.”

More About High-Deductible Plans

15

• Any income or benefit promise can be broken…even in union contracts

• NO employee benefit is “guaranteed”

• New economic realities require adjustment to avoid

– Accumulating debt due to negative cash flow

– Setting aside inadequate retirement savings

– Outliving retirement assets

• Proactive planning can mitigate benefit losses

So What Do All These Changes Mean?

16

• Work longer

• “Retire” while working

• Accelerate debt repayment

• Save the shortfall

• Consider career changes and/or freelancing

• Consider investing more aggressively

• Spend less and shop savvy

• Investigate new benefit alternatives

What to Do When Your Income/Benefits are Cut

17

• Time is an enemy (twice) for early retirees

– Fewer working years to accumulate personal savings, pension benefits, and SS

– More non-working years to finance

• The years just prior to normal retirement age are usually a period of peak earnings

• May have more control over “service” part of DB pension formula than “average earnings”

– Example: tenured professor with a pay freeze

Work Longer

18

• Employees heading for the door in droves fearing that an employer will cut benefits

• Employers could cut benefits anyway (no guarantees that you’ll be “grandfathered”)

• Examples:

– NJ state workers, teachers, uniformed personnel

– Federal government workers?

• In many cases, longer service will mitigate benefit reductions (e.g., loss of COLAs)

– Increases “Years of Service” part of DB pension formula

Beware of “Stampedes”

19

• Standard Strategy #1- Retire at a planned age with less money than anticipated due to NN events and risk running out of money due to benefit cutbacks, increased health care costs, longevity, etc.

• Standard Strategy #2- Retire later and risk “waiting too long” (e.g., after age 65-70) so that death, health “issues,” widowhood, etc. hinder planned retirement lifestyle and/or quality of life.

• New Strategy #3- Keep working BUT use money that had been going into savings (i.e., suspend or reduce 401(k) or 403(b) contributions) to begin enjoying “retirement activities” NOW without actually retiring.

https://www2.troweprice.com/iws/wps/wcm/connect/d2edab0046d7abf0a87eb899d35c25cc/04779-23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc (Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)

“Retire” While Working

20

Accelerate Debt Repayment

• Mortgage principal pre-payment

–Retire mortgage before retirement

• Mortgage refinancing (lower interest rate)

• PowerPay (consumer debt)

–www.powerpay.org

21

• Calculate amount lost from a retirement benefit cut

• Multiply by 25 to determine shortfall savings goal

• Do the math and develop an action plan to save

– Younger workers need to save < older workers

• Example: $6,000 annual benefit loss

– Need to accumulate $150,000 by retirement ($6k x 25)

– Age 45: $3,660/year or $305 per month

Save the Shortfall

22

• Public sector employment benefits are generally not as attractive as they once were

– Newer tier hires often have lower benefit tiers

• Option #1: Changing jobs could lead to better benefits; less stress

• Option #2: Aggressively demonstrate value to current employer (to earn a promotion)

• Option #3: Freelance for additional income or to replace lost income due to benefit plan changes

– Increased health insurance cost-sharing

– Increased pension plan contributions

Consider Career Changes and/or Freelancing

23

• Even with elimination of COLAs, people with DB pensions have income for life (acts like an annuity)

– Ditto for Social Security

• Most retirees with DC plans have risk of an ever-changing sum of money that needs to last a lifetime

• May be able to invest more aggressively if you have streams of lifetime income

• Know your risk tolerance: http://njaes.rutgers.edu/money/riskquiz/

Consider Investing More Aggressively

24

• Unpleasant as it is, you may need to spend less to adjust to the effects of broken promises

• Adjusting to less support from an employer or government may be a necessity, not an option

– “Stepping down” spending

– Moving to a smaller/cheaper home

– Phone apps to compare prices

– Coupons and groupons

– Asking for discounts

– Fewer trips and gifts (e.g., retirees)

– Other ideas?

Spend Less and Shop Savvy

25

• Explore benefit options that you might not have considered previously

– High-deductible health insurance and an HSA or HRA

• Do a cost-benefit analysis of alternatives

– Premium savings from high-deductible plan vs. amount of out-of-pocket payment

• Attend benefit fairs/seminars and ask questions

Investigate New Benefit Alternatives

26

• Changes to Social Security

– More needs-based? Older age? Lower benefits?

• Changes to Medicare

– More needs-based? Older age? Lower benefits?

• New health care law and aftermath

• Consider using very conservative benefit estimates for financial planning purposes

• Assume that you can’t count on promised benefits?

Keep an Eye on Government Benefits

27

Major Take-Away: Focus on What You CAN Control

CAN’T Control

• Speed of economic recovery

• Financial markets

• Labor market/unemployment rate

• Housing market

• Employee benefit cutbacks

• Political environment

• Actions of lawmakers

CAN Control

• Healthy lifestyle

• Spending habits

• Saving habits

• Investment expenses

• Human capital investments

• How you spend your time

29

Select What Works for You

• Think of these strategies as a

“Jersey diner menu”

• Adopt strategies that work for you

Questions? Comments? Experiences?