We are on borrowed time. That was the point of our November 2008 cover story. While baby boom retail investors might be focusing on the hit they took to their investment portfolios, they ought to be more worried about the health of their defined benefit plans (if they have one) and the various gub'ment promises (entitlements) they have been promised. As our cover story said, promises will be broken. (Or, to pay for them, taxes will have to rise by 2.5 times present amounts.)
In the private sector, of course, many companies simply can't afford their DB plans. The airline industry is exhibit A; can automakers be far behind? In our November "Fear & Loathing in Retirement Land" package, we noted how difficult it was for financial planners to create retirement plans for clients with iffy DB plans. The Pension Benefit Guaranty Corp. (PBGC), the gub'ment agency that guarantees the pensions of 44 million Americans, only pays about 84 percent of retirees' benefits; but for high-salaried DB participants, they receive a fraction of their promised annual benefits. (Airline pilots are good examples of highly-paid DB plan recipients who only get about a third or half of what they were promised.)
FAce it, the federal gub'ment --- and many state and local gub'ments too --- is essentially bankrupt (or will be soon at this rate). The price of Treasuries would tell you otherwise. But, really, the present value of future entitlements that have been promised by the federal gub'ment are already worth $56.4 trillion or more than $483,000 per American householed, according to the Peter G. Peterson Foundation.
I bring this up because of an opinion piece in yesterday's New York Post that describes how New York City's penions are going to bankrupt the city --- unless something is done about it. If you have clients with DB plans, you best tell your clients to expect less than they have been promised, particularly if they are public employees. Read this article, it is sobering indeed.