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Is your public pension at risk?

By Jennie L. Phipps · Bankrate.com
Thursday, December 5, 2013
Posted: 1 pm ET

Municipal and other public pensions took a legal and legislative whammy in the last few days.

A U.S. bankruptcy judge in Detroit ruled that the federal bankruptcy law trumps any protections afforded by Michigan's constitution. According to Barron's Income Investing blog, Moody's, the bond-rating service, summed up the potential nationwide impact of the decision:

The court held that the city may reduce accrued pension benefits because federal bankruptcy law, which allows for the impairment of contracts, will supersede the state constitutional language that prevents diminishment or impairment of earned benefits. Today's ruling sets an important judicial precedent establishing that pension benefits are unsecured contractual claims in Michigan and could be cited as precedent in other jurisdictions.

Meanwhile, two states away, the Illinois legislature mustered enough votes from both Democrats and Republicans to overhaul the deeply indebted state pension plan, which is only about 40 percent funded. The deal will cut benefits to retirees as well as current workers in order to shore up the pension system over the next 30 years.

If you are receiving a public pension -- or expecting one -- this is unsettling news no matter where you live.

Mark Mitchell, a Certified Financial Planner and retirement planning expert in the Detroit suburb of South Lyon, is a retired police officer. Many of his clients are also current and former public employees. In the wake of the action in Detroit, his phone has been ringing off the hook. He's been telling these anxious people -- who are worried about their retirements -- to stay calm.

"I'm saying, 'Don't do anything rash. This isn't the final straw because there is going to be a court appeal and that is going to take a long time,'" he says.

He also points to recent court decisions in San Bernardino and Stockton, Calif., two other cities facing bankruptcy, where courts have been more sympathetic to pensioners.

In the meantime, Mitchell is emphasizing to his clients the importance of maximizing the defined contribution plans most have in addition to their defined benefit pensions. These plans are similar to 401(k) plans but are labeled 457 plans when they are held by government employees.

"I'm telling people their 457 plans are federally protected. Nobody can go after them. They can't be attached by creditors. This is their money and their safeguard," Mitchell says.

For some, this will be nearly all they have because they didn't pay into Social Security. And even if they did have outside jobs that were covered by Social Security, what they are entitled to is greatly diminished by WEP, the Windfall Elimination Provision, a federal law that limits double dipping by public employees.

While he doesn't believe many public pensioners will actually lose their benefits, he does urge all of them to engage in smart retirement planning -- whether their current or former employer is in financial trouble or not. "One or two bad administrations can ruin everything," he says.

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14 Comments
M king
May 08, 2014 at 12:55 pm

My husband became a NASA employee in 1964. He paid FICA the FULL AMOUNT by law from the day he started the job. He retired after 24 years, allowed NOTHING from Soc Sec: Zero! Zip! Zilch!
Around 1983 Regan had taken social security away from civil service to save the gov't money. It's called the WINDFALL ACT. Look it up. It doesn't include military or postal employees, just civil service.

He was allowed to collect on the 12 years he worked in industry.
That was all. In 1988 that amounted to $141/mo.
After he died in 2005 I was sent the social security he paid into
during his military time. The check went up to $368 & stayed there.

bob brown
May 07, 2014 at 8:00 pm

their are a lot of postal workers who never paid into ss who are already retired. they all pay into it now but a lot of people who have been retired 10 12 years ago only have there pensions I know my brother in law is one.

JIM SMITH
May 07, 2014 at 5:50 pm

I WONDER IF CONGRESS HAS THE SAME PROBLEM, OR, ARE THEY EXEMPT FROM THIS ALSO.

pat
December 08, 2013 at 7:05 pm

Since 1982 Federal workers have been paying into Social Security.
I have seen some posts here that infer that Fed workers don't pay into SS. Get this into your heads: Feds pay into SS just like the every working Joe.

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