This document discusses how workers can no longer rely on promised income and benefits from their employers. It outlines how many employers have cut or restructured pensions, health benefits, salaries, and other compensation. This represents a shift to a "new normal" with more insecurity. The real cause of anger is that both public and private sector workers have lost pillars of financial support they once took for granted. The document provides advice on ways for workers to cope with these changes, such as saving more, investing more aggressively, spending less, working longer, considering new careers, and focusing on elements of their financial situation they can control.

1. Broken Promises: Helping
Employees Cope With Income
Losses and Benefit Reductions
Barbara O’Neill
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

2. What’s Happening?
Workers can’t even count on income and
benefits promised in their CURRENT labor
contract, not to mention promises made
years ago when they were first hired.

3. Era of Broken Promises
• Terminated pensions
• “Church plan” pension exemptions from ERISA
• Suspended 401(k) matches
• Salary cuts and freezes
• Furloughs
• Benefit cuts
• Pension COLA cuts
• Others

4. Key Themes During Past Few Years
Peggy Noonan reply to question from Maria
Bartiromo about “game-changing events
during 2011” on Wall Street Journal Report,
1/1/12
“The fall of structures that we’ve come to
rely on” and “Lots of insecurity”
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5. More Evidence of Broken Promises
New York Governor Andrew Cuomo, 12/16/11
interview about streamlining government,
including new pension benefit tiers:
“the whole system was designed at a different time
and a different place and it needs serious
reorganization.”
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6. The “New Normal” is Exacerbating
Broken Promises
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7. For Some, the Dream of Upward
Mobility is Slipping Away
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8. The Real Cause of All the Anger
While recent media reports have
covered angry protests directed at
public employees whose pension and
health benefit packages lasted longer
than most in the private sector…
…the REAL ISSUE is that workers in
both the public and private sector
have lost critical pillars of financial
planning support that they once
thought they could count on!
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9. More Background
• Increasing numbers of public (and private) sector job
benefits have been overhauled
– Employers realizing previously-promised benefits are
unsustainable and/or unaffordable
– Politically popular to slash public employee benefits
• More than half of public pensions are <80% funded
– < 80% level deemed “substantially underfunded”
• Defined benefit (DB) pension formulas and COLAs
especially under attack
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10. Why the Concern About DB
Public Worker Pensions?
• Employers bear the risk of providing formula-based
benefits calculated from:
– Highest salary levels (e.g., 3- or 5-year average)
– Years of service
• Greater life expectancy, medical advances
• Pension contribution under-funding
• Unrealistic growth assumptions
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11. Frequent Pension Plan Changes
• Lower benefit tiers for new hires
• Retirement ages raised (e.g., 55 to 60, 62 to 65)
• Automatic COLAs eliminated or scaled back
• COLAs tied to pension plan performance
• Changes in pension benefit formulas
– Elimination of “sick day” bonuses
– Change from “High 3” average salary formula to
“High 5”
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12. Case Example: New Jersey PERS
• “High Three” Average Formula (Current Tier 1 and 2)
– Years of Service/55 x Final Average Salary
– 35/55 x $60,000 = $38,181 annual pension ($3,181/month)
• “High Five” Average Formula (Could Happen)
– Years of Service/55 x Final Average Salary
– 35/55 x $52,000 = $33,090 annual pension ($2,758/month)
• Difference of > $5,000/year and $423/month
• See http://www.state.nj.us/treasury/pensions/estimate.shtml
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13. Health Benefit Challenges
• Workers’ coverage is decreasing and/or they
are increasingly paying more for:
– Premiums
– Deductibles
– Co-payments
• From 2000 to 2010, average premiums for
family coverage through an employer
increased 114%
• More employees’ ONLY option is high-
deductible health insurance
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14. More About High-Deductible Plans
• Moderately lower premiums than traditional plans
• Twice the deductible of conventional health insurance
– $1,908 average deductible (2011 Kaiser survey) vs. < $1,000
• Now the ONLY benefit option at Wells Fargo, General
Electric, American Express
– Public sector employees will be next!!!
• Often tied to Health Savings Accounts (HSAs)
– Tax-free employee savings accounts to cover deductible and
other medical costs
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15. More About High-Deductible Plans
• Percentage of workers enrolled in high-deductible
health plans quadrupled from 2006 to 2011.
• Often called “consumer-driven health plans”
• Encourages consumers to be more conscious of
medical-care costs; comparison shopping is difficult
• 2011 quote from health insurance company CEO:
“It’s safe to say we expect enrollment in consumer-
driven health plans to continue to grow.”
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16. So What Do All These Changes Mean?
• Any income or benefit promise can be broken…even
in union contracts
• NO employee benefit is “guaranteed”
• New economic realities require adjustment to avoid
– Accumulating debt due to negative cash flow
– Setting aside inadequate retirement savings
– Outliving retirement assets
• Proactive planning can mitigate benefit losses
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17. The Consequences of Inaction are
Serious
Example: 30 year suspension of COLAs on NJ state
pensions (legislated in 2011)
• Inflation effects will be corrosive (e.g., 4%)
– $10,000 annual pension payment at age 55
– Purchasing power of $4,563 in 20 years
– Purchasing power of $3,083 in 30 years
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18. Beware of “Stampedes”
• Employees heading for the door in droves fearing
that an employer will cut benefits
• Employers could cut benefits anyway (no guarantees
that you’ll be “grandfathered”)
• Examples:
– NJ state workers, teachers, uniformed personnel
– Federal government workers?
• In many cases, longer service will mitigate benefit
reductions (e.g., loss of COLAs)
– Increases “Years of Service” part of DB pension formula
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19. How Do People Adjust to Broken
Promises?
• Increase income
• Reduce expenses
• Save more money
• Reduce retirement lifestyle expectations
– Lower-cost housing and/or geographic area
– Less travel, gifting, entertainment
• Work longer than originally planned
• Ask family members for help
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20. What to Do When Your
Income/Benefits are Cut
• Work longer
• “Retire” while working
• Accelerate debt repayment
• Save the shortfall
• Consider career changes and/or freelancing
• Consider investing more aggressively
• Control investment expenses
• Spend less and shop savvy
• Investigate new benefit alternatives
• Define “success” differently
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21. Work Longer
• Time is an enemy (twice) for early retirees
– Fewer working years to accumulate personal
savings, pension benefits, and SS
– More non-working years to finance
• The years just prior to normal retirement age
are usually a period of peak earnings
• May have more control over “service” part of
DB pension formula than “average earnings”
– Example: tenured professor with a pay freeze
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22. “Retire” While Working
• Standard Strategy #1- Retire at a planned age with less
money than anticipated due to NN events and risk running out
of money due to benefit cutbacks, increased health care costs,
longevity, etc.
• Standard Strategy #2- Retire later and risk “waiting too long”
(e.g., after age 65-70) so that death, health “issues,”
widowhood, etc. hinder planned retirement lifestyle and/or
quality of life.
• New Strategy #3- Keep working BUT use money that had
been going into savings (i.e., suspend or reduce 401(k) or
403(b) contributions) to begin enjoying “retirement activities”
NOW without actually retiring.
https://www2.troweprice.com/iws/wps/wcm/connect/d2edab0046d7abf0a87eb899d3
5c25cc/04779-
23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc
(Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)
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23. Save the Shortfall
• Calculate amount lost from a retirement benefit cut
• Multiply by 25 to determine shortfall savings goal
• Do the math and develop an action plan to save
– Younger workers need to save < older workers
• Example: $6,000 annual benefit loss
– Need to accumulate $150,000 by retirement
($6k x 25)
– Age 45: $3,660/year or $305 per month
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24. Consider Career Changes and/or
Freelancing
• Public sector employment benefits are generally not
as attractive as they once were
– Newer tier hires often have lower benefit tiers
• Option #1: Changing jobs could lead to better
benefits; less stress
• Option #2: Aggressively demonstrate value to
current employer (to earn a promotion)
• Option #3: Freelance for additional income or to
replace lost income due to benefit plan changes
– Increased health insurance cost-sharing
– Increased pension plan contributions
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25. Consider Investing More Aggressively
• Even with elimination of COLAs, people with DB
pensions have income for life (acts like an annuity)
– Ditto for Social Security
• Most retirees with DC plans have risk of an ever-
changing sum of money that needs to last a lifetime
• May be able to invest more aggressively if you have
streams of lifetime income
• Know your risk tolerance:
http://njaes.rutgers.edu/money/riskquiz/
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26. Spend Less and Shop Savvy
• Unpleasant as it is, you may need to spend less to
adjust to the effects of broken promises
• Adjusting to less support from an employer or
government may be a necessity, not an option
– “Stepping down” spending
– Moving to a smaller/cheaper home
– Phone apps to compare prices
– Coupons and groupons
– Asking for discounts
– Fewer trips and gifts (e.g., retirees)
– Other ideas?
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27. Investigate New Benefit Alternatives
• Explore benefit options that you might not
have considered previously
– High-deductible health insurance and an HSA or
HRA
• Do a cost-benefit analysis of alternatives
– Premium savings from high-deductible plan vs.
amount of out-of-pocket payment
• Attend benefit fairs/seminars and ask
questions
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28. Keep an Eye on Government Benefits
• Changes to Social Security
– More needs-based? Older age? Lower benefits?
• Changes to Medicare
– More needs-based? Older age? Lower benefits?
• New health care law and aftermath
• Consider using very conservative benefit estimates
for financial planning purposes
• Assume that you can’t count on promised benefits?
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29. Major Take-Away:
Focus on What You CAN Control
CAN’T Control CAN Control
• Speed of economic recovery • Healthy lifestyle
• Financial markets • Spending habits
• Labor market/unemployment • Saving habits
rate
• Investment expenses
• Housing market
• Human capital investments
• Employee benefit cutbacks
• How you spend your time
• Political environment
• Actions of lawmakers

30. Questions? Comments? Experiences?
• Think of these strategies as a
“Jersey diner menu”
• Adopt strategies that work for you
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