How You Can Fight This Huge New Threat to Your Retirement

Source: TaxRebate.org.uk via Flickr.

Saving for retirement is one of the biggest financial challenges Americans face in their lives, and lately, it has only gotten harder to find ways to set money aside to build up a retirement nest egg. Unfortunately, workers don't get as much support from their employers as they did in the past. To make matters worse, as part of the spending bill it approved over the weekend, Congress just passed a new measure that makes it much easier for some employer pension plans to renege on their past commitments to their workers -- and sets a precedent that could have a much broader impact on all retirees in the future.

There is, however, a way you can fight this huge new threat to your retirement. First, let's take a look at what Congress has done and how it could begin a domino effect that could hurt your retirement prospects.

Dreams of pension riches have gone up in smoke. Image: hikingartist.com via Flickr.

The intricacies of multiemployer pension plans
On its face, the latest threat to retirement finances might appear to be limited in scope. The congressional bill focuses on what are known as multiemployer pension plans, which typically involve groups of companies within the same industry or line of business joining ranks to offer their employees pensions. The U.S. currently has about 1,400 multiemployer plans, but they tend to be large, with an estimated 10 million American workers covered under their pensions.

More importantly, many multiemployer plans have fallen on hard times lately. About 1.5 million workers covered under 200 plans are at risk of not having enough money to pay full benefits over the next 20 years, according to The Washington Post. Roughly half of these multiemployer plans could have to reduce pension payments to current retirees within a much shorter time frame in order to stay solvent.

Source: 401kcalculator.org via Flickr.

The basic problem that multiemployer pensions face is the tug-of-war between current and future benefit recipients. In many cases, pension plans could afford to keep paying current retirees the benefits they've promised, but the hit to the plan's assets would leave future pension recipients with nearly no chance of getting benefits of their own. By contrast, cutting current payments would shore up a plan's long-term financial prospects, but at the cost of hurting current retirees, who have little or no opportunity to adjust their financial planning to deal with lower income.

Promises unfulfilled
Some proponents of the pension-cutting measures have pointed to the generous benefits that some retirees receive under pensions. What they tend to forget, though, is that those benefits were part of a bargained-for employment contract, and many workers agreed to accept lower base pay and salaries throughout their careers with the expectation that their sacrifice would be rewarded in retirement.

More worryingly, many pension advocates note the potential long-term impact of allowing any pension cuts. By allowing lawmakers to modify benefits that workers have already earned and have a property right to, it could make it politically easier to make similar changes that affect a wider range of Americans in future years.

Source: PBGC.

Still, with multiemployer pensions, the alternatives are pretty ugly. Workers have rights to recover some lost benefits from the Pension Benefit Guaranty Corporation if pension plans fail, but the limits on that recovery are extremely low at roughly $13,000 per year. Moreover, the PBGC is under some financial pressure, further endangering retiree income among pensioners.

The only solution
For retirees, fighting for their pension rights is the only viable way to protect themselves from the potentially disastrous reduction in their income. But younger workers have a better solution: boosting their savings to protect themselves from future benefit cuts. By taking advantage of special tax-favored retirement accounts like IRAs as well as using regular investment accounts, you can put yourself in a much better position to provide for your own retirement needs even if your employer squirrels out of any pension obligations it has to you.

Pensions have been under fire for a long time, and the latest move from lawmakers is just another in a long series of events that have put more of the onus on you to build up your own post-career savings. As big a threat as the loss of pensions is to retirement security, the increased willingness of lawmakers to take steps to jeopardize your future retirement income -- whether it comes from pensions or other sources such as Social Security, which could see future changes -- leaves you as your own last defense to ensure a financially comfortable retirement.