Why You Should Plan for Retirement Without Social Security and Pensions

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Illinois may become the first state in the United States with a junk credit rating. The state has been trying to figure out how to pay $15 billion of unpaid bills and close a pension shortfall of $251 billion. It has been rumored the state will need to halt the sale of lottery tickets because it won’t be able to pay lottery winners. Additionally, this will be the third year in a row the state has failed to pass a constitutionally required budget[1].

Junk credit status is not the only first for Illinois. It was the first state to pass a law requiring companies to automatically enroll their employees in a state sponsored Roth IRA if they do not offer a retirement plan. The Illinois Secure Choice Savings Program (Secure Choice) was scheduled to begin July 1, 2017.

Illinois’ Secure Choice Savings Plan

Secure Choice applies to employers with 25 or more workers who have been in business at least two years. Workers can opt out if they choose. Employers with fewer than 25 employees, or those that have been in business for less than two years may participate voluntarily. There is no cost to the employer other than the administrative cost to enroll workers and process the payroll deduction.

Secure Choice participants will be enrolled in a default target date Roth IRA with a default 3% payroll deduction, but could choose to change their contribution level or fund option at any time, or choose to opt-out of the program altogether. Accounts are owned by individual participants and will be portable from job-to-job.

Illinois passed the law in response to a U.S. Bureau of Labor Statistics study that found 72% of private-sector workers in high-turnover, low-wage industries lacked access to a retirement plan. Only 40% of households owned any type of account – IRA, 401(k) or traditional pension – down from 48% over the last six years. An estimated 1.2 million workers will gain access to employer-based retirement savings plans through the new plan. Individual accounts will be pooled and managed by a private investment company selected through a competitive bidding process.

Unfortunately, Secure Choice suffered a setback when Congress repealed a Department of Labor (DOL) rule in April that offered companies protection against employee lawsuits over this type of retirement plan. Illinois plans to move forward with the plan because it is designed to make the state the fiduciary for the program, not the employer. Businesses merely have the responsibility of enrolling their employees and sending money to a state program to be invested.

Secure Choice was amended in June to extend the start date until 2018 and expand the default contribution rate within the range of 3% to 6% of an enrollee’s wages (rather than 3% of wages). The amendment provides that the program shall ensure that all eligible employers are required to enroll their employees in the Program by December 31, 2020.

Six more states have passed similar laws – California, Connecticut, Maryland, New Jersey, Oregon, and Washington. 23 other states have introduced legislation or have formed task forces to study the issue. California has also decided to move forward with its plan despite the DOL rule change.

I am struck by the irony of Illinois’ pension deficit problem and the attempt to set up the first automatic enrollment account for employees without retirement accounts at work. The Illinois pension system covers nearly 1 million workers. The latest summary of financial condition for fiscal year 2016 showed the plan only had enough assets to fund 37.6% of promised benefits[2]. These workers should be offered Secure Choice plans so they can put some money away in the event promised benefits cannot be paid.

Use Illinois as a Reminder to Save for Retirement

The Illinois situation is a wake-up call to everyone saving for retirement. You should plan for retirement without pensions and social security. Detroit cut $7.8 billion from pension payments to their retirees as part of a plan to get the city out of bankruptcy. Retirees sued the city to force them to restore benefits. The retirees lost in an appeals decision. The presiding judge was sympathetic to the retirees but said restoring benefits would likely put the city back into bankruptcy. The city also cut $4.3 billion in retirement health care benefits[3].

Take control of your retirement by establishing your own retirement plan:

  • Utilize an employer sponsored retirement plan if one is available to you. These plans typically offer tax advantages when making contributions.
  • Set up an IRA or Roth IRA and make the maximum contribution each year.
  • Save and invest money after-tax in a brokerage account. The account won’t provide immediate tax benefits. However, the investment return in the form of long-term capital gains or qualified dividends is taxed at a lower rate than pensions or retirement account withdrawals.

It’s unlikely pensions and social security will disappear completely. Though, there is a reasonable probability they may pay less than promised. It would be pure speculation on how benefits might be reduced. Detroit retirees saw benefits reduced across the board by a fixed percentage. Many have speculated Social Security benefits could be means tested which would only reduce benefits to those who have other forms of income. The Illinois situation is worth watching. It should serve as a wakeup call to everyone to evaluate his or her retirement plans.

 Rick’s Tips:

  • Illinois may become the first state in the United States with a junk credit rating.
  • The start date for the Secure Choice plan in Illinois was extended to 2018.
  • Detroit retirees had their benefits cut across the board so the city could come out of bankruptcy.

 

Want to take control of your retirement plan? Contact us for assistance in planning for your retirement goals.

[1] Source: How Illinois became America’s most messed-up state. By Matt Egan, CNN Money. July 1, 2017

[2] Illinois Pension Funding Ratio Sinks To 37.6% As Unfunded Liabilities Surge. By Tyler Durden. November 16, 2016.

[3] Appeals court rejects challenge to Detroit pension cuts. By Jennifer Chambers, The Detroit News. October 3, 2016.

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