Pension Changes Could Limit Retiree Income

Two weeks ago the Treasury released proposed and temporary regulations in support of the Kline-Miller Reform Act. This could amount to be a huge blow to retirees who are counting on pension benefits to fund their retirement. These regulations allow for:

– Reduction of benefits for current retirees
– Increased Sponsor and participant contributions
– Reducing early retirement subsidies

The most glaring impact may be the ability of plans facing insolvency the right to immediately reduce benefits to no less than 110% of the PBGC guarantee, the maximum is currently $13,000 per year. This means that pension benefits of current retirees could be reduced to no less than $14,300 in 2015.

Participants who are 80 or older or those who are on disability are exempt from these benefit adjustments. For participants who are 75 or older at the time of implementation there will be a phase out applied.

Plan participants of these plans are most likely to be impacted by these regulations. If you are currently receiving benefits from one of these plans or anticipate receiving benefits from them in the future, you should consult your financial advisor.

When meeting with your advisor, it is best to discuss how potential reductions in benefits will be offset by either:

– Retiring later
– Living with less income
– Contributing more to your retirement savings accounts

While none of these options are preferred, the reality is that most people will have to make adjustments to their retirement plans to make ends meet. Social Security benefits are another income source that could be maximized to help offset the effects of reduced pension income. Most people do not even collect their full retirement benefits due to them because they take benefits before their retirement age.

By waiting until your full retirement age you can collect 100% of your own benefit. You can gain a delayed income credit each year until age 70 by delaying beyond your full retirement age. This could potentially increase your benefits by 32% if you wait until age 70 before filing for benefits. While you may wait until age 70 to collect your own benefit, you may be eligible to apply for your spouse’s benefit while waiting. This strategy is known as a file and suspend option, which should be discussed with your advisor.

Due to the bleak financial standing of the PBGC and it’s own acknowledgement of fiscal duress (see 2014 annual report) we should expect further pension changes in the future. If you have questions about how these regulations impact your retirement or how your financial plan should be adjusted as a result please feel free to contact me.