The Only Way to Save Your Retirement

For generations, millions of Americans have planned their post-career lives based on a simple idea: that the retirement benefits they were promised would actually be there and help support them in their golden years. Now, though, those promises are more endangered than ever -- and the story of one employer that reneged on them entirely, leaving its former workers with nothing, has sent shockwaves throughout the pension industry.

Broken promises in small-town America
Last week, the New York Times reported on how Prichard, a small town in Alabama, took what pension experts say was an unprecedented step in handling its retired employees. After filing for bankruptcy twice, the town knew that it had to take action or else its pension fund would run out of money. Yet the town did nothing -- and sure enough, all the money dried up.

The unprecedented step, though, was what came next. Rather than hiking taxes or issuing bonds to try to raise money to pay its pension obligations, Prichard simply stopped paying retirees their monthly benefit checks. In the wake of that decision, former town workers have had to return to work, declared bankruptcy, or ask for help in order to get by. And current workers are paying into a system that they can almost be certain will not be there to pay them back when their turn comes to retire.

Coming to a theater near you
Before you dismiss this as a one-time event, keep in mind that a lot of cities and towns are dealing with the same struggles as Prichard. In a tug of war between providing services, maintaining reasonable tax levels, and taking care of pension obligations, something has to give for state and local governments. New York City is spending billions to shore up its pensions. Colorado, South Dakota, and Minnesota have made benefit cuts, provoking lawsuits from outraged pensioners. Maryland is even considering raising its retirement age.

Even more dire is the fact that the problem is likely to get worse. Look at the demographic trends from the 2010 Census, and you'll notice that several states that have shown the greatest population increases have no state income tax, including Florida, Texas, Washington, and Nevada. Meanwhile, high-tax states like New York, Massachusetts, New Jersey, and Pennsylvania saw much slower population increases -- leaving fewer people to shoulder a greater tax burden.

Nor are the problems limited simply to public employers. Many private companies have severe pension shortfalls. For instance, here are the worst-funded pensions as of the beginning of this year, taken from a list of the 50 largest pensions in a report from Goldman Sachs:

Source: Goldman Sachs.

Now granted, just because these private pensions have funding deficits doesn't mean that workers won't get what's coming to them. There are a lot of safeguards built into the private pension system to ensure that workers get their benefits, including federal backing from the Pension Benefit Guaranty Corporation.

The point, though, is that the looming demographic crisis of the Baby Boom's retirement will have an impact on both the public and private sectors. And it won't be a free lunch for anyone -- tradeoffs will be necessariy, and some people are going to end up making sacrifices.

Do it on your own terms
In practical terms, what that means is that you need to take steps to safeguard your own retirement. As unfair as it may be after working an entire career based on a promise that may never come true, you owe it to yourself to have a backup plan in case your employer's pension doesn't give you what you deserve.

Situations like what we're seeing in Prichard, Alabama are unfortunately going to be increasingly common. Only by setting aside your own savings can you be sure that you won't be the next victim.

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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.