While fewer American retirees and seniors preparing to enter retirement have access to pension plans from their employers, those who do have such plans are absorbing an economic shock stemming from the economic inflation currently plaguing the American economy. This is according to reporting at CNBC.
“Many pensions periodically increase recipients’ payment amounts by offering a cost-of-living adjustment (COLA),” the reporting says. “But those raises are small relative to the 8.5% annual inflation rate in March, the highest in over 40 years. Some plans, especially corporate pensions, don’t offer any COLA.”
The result is that retirees who solely rely on pensions for cash flow in retirement are seeing diminished purchasing power, especially if they do not take Social Security payments. Those benefits typically do come with a COLA, though it has struggled to keep up with inflation even after having been increased by its highest level in decades recently.
“The real value of that pension will go down,” says Jean-Pierre Aubry, an associate director at the Center for Retirement Research (CRR) at Boston College to CNBC. “It will basically buy less at the supermarket than it used to.”
Economists at present are not settled on whether or not the recent spike in inflation is over. Some believe it may have peaked in March, according to CNBC.
The issue surrounding inflation and pensions is striking former public sector employees most acutely, the reporting reads, since pensions are more prevalent in the public sector than they are in the private sector which has largely opted for investment-based 401K plans.
“86% of state and local government employees had access to a pension plan as of March 2021, according to U.S. Department of Labor,” the reporting says. “Just 15% of private-sector workers had pension access.”
However, it’s not uniformly bad for those with access to pensions. According to the Texas Association of Public Employees Retirement Systems, pension systems for many of that state’s firefighters, police and municipal employees beat actuarial investment return targets for the last 20-year period and outperformed global 60/40 returns in the 10- and 15-year periods, according to a recent announcement.
“Combined, their FY2020 dollar-weighted portfolios allocated 52% to domestic, international, and global equities; 25% to alternative strategies; 23% to fixed income; and -0.6% to cash and short-term securities,” the announcement read. “The alternative strategies component included private equity, real estate, venture capital, marketable alternative strategies, commodities, and diversified infrastructure.”
Read the reporting on the national trends at CNBC.