We just wrapped up National Retirement Security Week. Now is a great time to take a peek at your retirement accounts and increase your contributions. Also make sure that your fees are as low as possible and your allocations are correct. I personally started contributing 5% of my gross salary to a Roth 401(k). This is in addition to my regular 401(k), Roth IRA, and other retirement contributions, including my pension. I’m working hard to set my family up for a comfortable, secure retirement.

Do You Have A Pension?

Speaking of retirement security, let’s chat about pensions. As public servants, many of us are lucky enough to have a pension. Many public service employees participate in plans administered by their state. Local government or municipalities can also run pension plans. A pension is a valuable retirement benefit to police officers, firefighters, and EMS workers. It helps make up for the lower salaries of many public servants when compared to the private sector. It can also serve as a recruitment tool to increase our ranks. Our pensions also represent the public’s continued appreciation for our service, in a time when many private industries have abandoned defined benefit plans.

Not everyone views public service pensions as necessary or good, especially some of those whose taxes are footing the bill. In today’s political climate, a candidate’s position on public service pensions can win or lose them an election. If you plan on relying on your pension in retirement, let your elected officials know how important it is to you.

The other night, I watched the debate between the two candidates for the office of state treasurer in my state. They both touted their experience and backgrounds, but they both emphasized the importance of two things related to pensions. One was the responsible investment of the state’s employees’ funds, and the other was reducing the cost of investment fees in the plan. Even with different political views, they agreed that these are two of the most important parts of a pension plan.

Right now, I contribute 6% of my gross income to my pension. My employer contributes 7% (which is set by an actuary). I expect my state treasurer to negotiate the lowest fees possible, invest my money wisely, and fully fund my pension so it is there when I retire.

When Are You Eligible?

Many pension plans say that you are vested, or a permanent member, after 5 years of creditable service. How long do you need to work to be eligible for your full pension? Some plans use a combination of age and years of service. My retirement system gives full retirement benefits to firefighters who reach 30 years of service or whose combination of age and years of service equals 85. Our police officers reach full retirement earlier than that.

Many systems also allow early retirement, but pay benefits at a reduced rate that depends on how early you retire. If you are close to retirement, schedule an appointment with your Human Resources representative. They should be able to tell you when you can retire and how much your benefit will be. If you are not close to retirement, make sure you are taking advantage of any matching offered by your employer and keep socking away your contributions.

Will Your Pension Be There When You Retire?

Even if you have a pension today, it may not provide the benefit in retirement that you expect. An insolvent pension plan is one that cannot meet its obligations. Pension plan insolvency has caused the bankruptcy of several municipalities, notably San Bernadino and Stockton, CA. The California Supreme Court has recently taken up the case of modifying pension benefits for existing workers. Their ruling could pave the way for changes in the pension system nationwide.

Not all pension plans are fiscally sound. Only the two top-funded state programs, in South Dakota and Wisconsin, are fully funded. The other 48 state plans will not be able to meet their obligations if funding continues at current levels. According to the most recently available data, Illinois has the biggest hurdle to overcome, with an over $100 billion shortfall. Many other states are not far behind, and are controlled by politicians who are not pension-friendly. You can see where your state’s pension plan ranks here.

How does a pension plan get to be underfunded, especially if governments are required to have a balanced budget each year? Pensions are defined benefit programs, meaning that the government entity is obligated to pay benefits to its members in the future. In contrast, a 401(k) is a defined contribution program, in which an employer budgets to contribute a set amount each year. Because pensions are defined benefit, each government is only required to budget for payments it plans to make to retirees in the upcoming year. They can legally choose to skip payments into the pension system.

Government entities also get to estimate their investment returns. Some overestimate the expected return on their plan’s investments. The financial crisis also contributed to the pension shortfall for many programs. Many plans earned less on their investment returns than expected, which means that administrators have to put even more money into the plans to catch up. If they fail to add that extra money, it leaves the pension fund underfunded, and increases that government’s debt in the future.

Will Your Pension Be Enough in Retirement?

Your plan administrator sets the formula that determines your pension’s payouts. The formula takes into account your average salary from your consecutive highest paid years (typically 3-5). For most employees, the highest paid years are usually their last. The formula also considers your length of service, and applies a retirement factor (typically a percentage from 1-5%). Formulas for many plans are listed here.

Check you state treasurer’s website for access to your pension account. My account allows me to see the actual value of the investments and will calculate an estimate of monthly benefits. This estimate is based on my current salary, but gives me a good idea of what I can expect when I retire. To determine how much you need in retirement, check out my post on the subject here.

Social Security rules legally block many public servants from contributing. If you are eligible to receive Social Security benefits when you retire, good for you. Just know that your pension may reduce your Social Security payout. Don’t be surprised if you file for Social Security and it is less than you expected, even if you worked another job that entitles you to receive full benefits. You can read more about the two Social Security Administration rules that govern this here.

Where To Go For Help

Employees can choose from several programs designed to help them navigate the complexities of their pensions. The American Society of Actuaries offers four hours of free help from a professional who specializes in pensions. The Pension Rights Center runs a program that provides referrals to those with questions about their plans.

Don’t Forget To Diversify

I expect that in the 20 years until my retirement, we will see a big change in the number of public service pensions left. If my pension is still able to pay me when I retire, that’s great. If not, I have contributed enough to other retirement accounts to support my family without a pension. I have diversified my retirement accounts just like I have diversified the funds within them.

Your pension may not be there to support you in retirement. Make sure you have diversified your retirement accounts. Open an IRA or add more to your 401(k). Increase the number of paths you can take to a successful, secure retirement.