Additional lump-sum pension payments have been approved by the Treasury Department. If the retiree accepts these buyouts, there is a good chance they are going to lose their money. The recent pension changes have enabled companies to buy out the lifetime annuity payment of the senior with just one lump-sum payment. This change may have a negative impact on the financial security of numerous older Americans for their futures. A lot of companies have started offering previous employees receiving pension payments the opportunity to receive one big payment upfront as opposed to receiving a check every month for the remainder of their lives. This is happening because the companies are trying to decrease their overall costs.
In 2015, the Treasury Department during the Obama-era stated they intended to prohibit lump-sum pension payments. The determination was made when the majority of retirees lost a lot of money when they accepted the option for an up front, one time payment. The Treasury Department began working on rules to stop the practice of lump-sum payments. The current pension plans were then advised to stop offering the retirees a lump-sum. Earlier in the month, a quiet announcement was made by the Treasury Department. They stated they no longer intended to work on establishing rules. This means the companies are once again able to offer a lump-sum to buy out the pensions of the retirees who are currently receiving them.
According to the individuals advocating for older Americans, the lump-sums are not a good choice for those receiving pensions. The Policy Director and Executive Vice President of the Pension Rights Center is Karen Friedman. She stated many of the retirees believe accepting a large amount of money for their pension is a good choice. The retirees are often offered as much as $300,000 or $400,000. They believe the lump-sum is the right choice because they can invest this money in the stock market. The economists have warned the retirees that duplicating the security achieved with a pension is rare. The Legislative Council for AARP is David Certner. He said if the retirees make the wrong choice, the result may be extreme financial hardship in the future.
There are in excess of 26 million Americans currently participating in a pension plan paid by their employers. This number has been consistently decreasing for decades due to the 401(k) plans the employers have been offering. The 401(k) plans are preferred by most companies because the risks are transferred to the employees. Pensions paid by the employer have a financial commitment for the long-term. The problem with annual pensions paid in a lump-sum buyout is the retirees usually spend the funds far too quickly. MetLife conducted a survey in 2017. They revealed 21 percent of the retirees accepting this type of payment spent all of the funds in a little over five years. Of the individuals with money left after this time, 35 percent stated they were concerned the money would not last for the rest of their lives.
In most cases, the funds received from lump-sums for retiree pensions are not spent on the needs for retirement. According to the Metlife survey, 63 percent of the individuals accepting the lump-sum stated they spent the money during the first year on major purchases. This included various luxury items, home improvements and vacations. Only thirty percent used the funds for expenses or to pay off debts. According to Karen Friedman, any retiree with a guaranteed pension it is impossible to outlive offered a lump-sum instead is similar to Adam deciding eating the apple while in the Garden of Eden was a good idea. It is easy to be tempted by anything that appears to be good, but giving in to temptation often leads to significant regrets.