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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:


Pension Shortfall

Pension Status as % of Adequate GAAP Funding

Exelon (NYSE: EXC  )

$3.64 billion


Lockheed Martin (NYSE: LMT  )

$10.66 billion


Disney (NYSE: DIS  )

$2.16 billion


General Dynamics (NYSE: GD  )

$2.45 billion


Xerox (NYSE: XRX  )

$1.3 billion


International Paper (NYSE: IP  )

$2.76 billion


Pfizer (NYSE: PFE  )

$3.97 billion


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.

Learn how to take care of your own retirement. Click here and read the Fool's new special report, The 7 Secrets to Salvage Your Retirement Today.

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

Fool contributor Dan Caplinger has gone his own way with his retirement for his entire career. He doesn't own shares of the companies mentioned in this article. Walt Disney, Exelon, and Pfizer are Motley Fool Inside Value recommendations. Walt Disney is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended writing covered calls on Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't leave you hanging.

Read/Post Comments (8) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2010, at 8:02 PM, mthammer wrote:

    States Like New Jersey especially, PA. NY. Virginia are all in trouble very much like California & Arizona. All these states are broke because they never reinvested their employees Pension Funds . So all the people that are expeting these high monthly incomes when they are retire from these state jobs will end up with nothing. Just like the US Government is going broke on Social Security , it was set up as a separate account for people who paid into the system . However that all ended when President Clinton told Congress they could use this money in the General Fund. there by putting social security in a BK situation. Everybody gets paid out of Social Security , even illegals, who have never paid into the system, they collect when they reach 65 because some liberal Senator & all his cronies passed a law sayoing they could. The people in New Jersey , former police, firemen , may not have a pension , because their states have used the money in the General Fund or stold the money.Last year 30 of them in New Jersey were locked up because they were using the retirement funds for themselves . Doctors, lawyers, Rabbi's , elected officials , senators & local officials caught taking that retirement money on a scam. The state is so far in debt with the municiple funds that they issued that they can't pay the holders back. That's what is happening in NY & the rest of the states . California paying all these medical, hospital, prison expenses for illegals can't do it anymore , they are billions in debt.

  • Report this Comment On December 28, 2010, at 12:28 PM, twosense wrote:

    Mthammer wrote:

    Everybody gets paid out of Social Security , even illegals, who have never paid into the system....

    Sorry, I think you have been watching to much Fox News. This just is not true.

  • Report this Comment On December 29, 2010, at 6:25 AM, pete163 wrote:

    This is a really good read, However one must think! The mass of people that are trying to rebuild there retirement just don't have the lumps of cash and know how to do what your asking. Some how you need to come back to earth with the rest of us.

  • Report this Comment On December 31, 2010, at 11:55 AM, Gorm wrote:

    All this will be amplified as States and municipalities are unable to meet a balanced budget this year.

    They have played games for years, robbing peter to pay paul, specifically diverting money that should have gone to shore up pensions to spend elsewhere. They could do so because equity performance took up the slack.

    SO, as I see the pressures will intensify. Why?

    1) These entities have mismanaged budgets for years, promised much that is no longer deliverable. Often, the same managers pumping up benefits also benefit from their failed negotiations with unions.

    2) Benefits are unreasonable by the average American's perspective, ie up to 80% benefit after 25-30 years is ridiculous and unsustainable.

    3) You'll not get citizens to agree to tax hikes to pay such unreasonable benefits.

    4) A market correction will only exacerbate their funding problems.

    5) Once this NYC fiasco grows legs that unions staged a protest by delaying service (emergency response and snow removal) because of threatened cutbacks will piss off citizens. Just goes to show this union sense of entitlement has been pushed to the ridiculous and citizens will DEMAND a reality adjustment.


  • Report this Comment On January 03, 2011, at 4:19 AM, thidmark wrote:

    "Sorry, I think you have been watching to much Fox News."

    Do you have a link for this or are you just spouting off "to" much?

  • Report this Comment On January 03, 2011, at 4:10 PM, 94hokie wrote:

    @pete163 - then they (me, you and EVERYONE else included) better start paying attention. I think that's our country's main problem, people just don't pay attention. Oh, they know all about sports and jet skis and American Idol but sh*t about life.

  • Report this Comment On January 03, 2011, at 4:12 PM, 94hokie wrote:

    PS - yes it's bad when pensions get stold. Shrapen the guillotines!

  • Report this Comment On January 25, 2011, at 6:29 PM, galaxysurfer77 wrote:

    There There There . none of that

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