Is Your Pension Fund Actually a Ride on the Titanic?
An article released December 8th, 2016 by the Dallas News gives an in-depth look at the crisis facing the Dallas Police and Fire Pension System. The fund has essentially become the Titanic, and they’re hoping to change course before they hit the iceberg.
Since August more than $500 million has gushed from the fund after the board proposed benefit cuts. On Wednesday, Dallas Mayor Mike Rawlings filed a lawsuit to halt withdrawals from the fund. That caused a run that threatened to completely drain the coffers. As an immediate stop gap, the pension’s Board of Trustees then moved to suspend lump-sum withdrawals.
The iceberg they’re all trying to avoid is $154 million in new withdrawal requests that would leave them without the liquid reserves to sustain the fund.
Council member Philip Kingston, a board trustee, said the mayor “unquestionably” forced the pension board’s hand. He said Thursday was “the worst day I’ve had in public office.”
Rawlings said, “This thing was going down and all we were doing was rearranging some deck chairs. Now we’ve righted the ship. We can fix it and get it in good shape.”
Though pension holders will receive their regular monthly checks, the well-intended board members and city officials are essentially pinching off pension holders’ access to their money in order to ultimately save them. It’s definitely a botched situation for pension holders; especially since this particular group doesn’t receive social security. However, just when you think it stinks to be them, remember that instability can happen in any pension, bank, or 401k situation. And as a taxpayer you will literally take the brunt for this pension too. Here’s why.
If the pension fund is allowed to experience a run, it will immediately go bankrupt or insolvent—unless . . . they are rescued by a taxpayer bailout. In the case of Dallas Police and Firefighters, it will probably be both pension holders and taxpayers who bear the burden. The Dallas Police and Fire Pension system has requested a $1.1 billion taxpayer bailout.
The system will discuss a new withdrawal policy at January’s board meeting. The policy will probably include limits on withdrawals but would carve out an exception for hardships such as medical emergencies.
Until then, the only withdrawals allowed will be annual minimum required distributions for tax reasons.
All pensions, along with our entire banking system and Wall Street, only work when participants “play by the rules” and withdraw small amounts of money at a time. The irony is that losing confidence in the system is what ultimately solidifies its downfall.
The case in Dallas is a great example of how quickly a pension fund can become at risk. That’s why when clients come to us for financial advice; we always recommend that they build retirement wealth outside of pension funds and Wall Street. And we know that a real financial plan must include other areas such as debt management, large expense planning, tax planning. We always recommend what we call The Perpetual Wealth Strategy. It’s a financial system that uses permanent life insurance as the investment vehicle.
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