by Al Rettig
The 1954 Broadway musical comedy The Pajama Game centers around labor strife at the Sleep-Tite pajama factory. When the new contract brings a raise of only seven and a half cents an hour, the rank and file are enraged. At the height of their fury, naturally they break into song:
Seven and a half cents doesn't buy a hell of a lot;
Seven and a half cents doesn't mean a thing.
But then somebody does the math and realizes that even small increases are meaningful in the long run. Within a few years the tiny raise will turn into folding money:
That's enough for me to get
An automatic washing machine,
A year's supply of gasoline,
Carpeting for the living room,
A vacuum instead of a blasted broom,
Not to mention a forty inch television set!
Truth in Advertising I: Seven and a half cents in 1954 translates to about seventy cents today, representing a cumulative inflation rate of almost 800%. A lesson in itself.
Truth in Advertising II: If there were 40 inch television sets in 1954, we don't remember them. 21 inches was pretty much the big screen standard in the mid-century living room. On the other hand, today's models commonly exceed 60 inches with some systems topping 100 inches. That's another form of inflation!
The Pajama Game paid tribute to the value of money over time. And it's a good perspective to keep in mind as we think about our Red Cross defined benefit pensions--our "pension plan." Sometimes we hear retirees grumble that, to paraphrase the song, a 1% increase doesn't buy a hell of a lot. In the short term that's true. The few extra dollars each month can seem like those seven and a half cents back in 1954. But just like at the pajama plant, there's more to the story. Consider:
- For most retirees, the Red Cross defined benefit pension has increased by 1% a year every January like clockwork, and we can reasonably hope this practice will continue. By contrast, the increase to our Social Security benefit for 2017 is 0.3%, there was no increase at all in 2016 and in 2015 the increase was 1.7%. Over these three consecutive years Red Cross pension increases add up to 3% while Social Security's come to just 2%. Will this always be the case? Certainly not. Interest rates are likely to rise, and with them inflation will creep upward (moderately, we hope). When that happens, Social Security annual increases, which are based on inflation, will exceed our 1%. But the point here is balance. We see that in times of low inflation our 1% per year can exceed the increases from Social Security. When inflation climbs, Social Security payments will too, and higher interest rates will mean more opportunities for other forms of saving to grow more aggressively. Again, the key factor over time is balance.
- Our life expectancies are increasing, and those 1% annual jumps look a lot more significant when they're compounded over 20 years--or many more!
- We are fortunate to have a defined benefit plan. Only a small minority of retirees still has one. The defined contribution plans like 401(k)s that the Red Cross and most other employers have adopted for new hires can work very well, but they only deliver full value when the employee is both a disciplined saver and a knowledgeable investor. It's up to workers and retirees to manage these plans themselves, and they often make serious and sometimes catastrophic mistakes, including contributing too little, balancing their portfolios poorly and withdrawing too much too soon. By contrast, defined benefit plans like ours feature professionally managed portfolios and regular payouts. And remember, we were never required to contribute a penny into the plan during our working years.
With all that said, should we rely on the combination of Social Security and our Red Cross pension to meet our retirement needs? The answer is no. Recall the "lesson of the three-legged stool" from those pre-retirement seminars. Financial independence, they said, will flow from three sources: your pension, your Social Security, and your personal savings and investments. And they were right.
If you find that you've neglected that "third leg" over the years, is it too late to do something about it in retirement? Maybe not. For many retirees there are prudent strategies available to generate additional income. The key to finding them is a good, unbiased financial planner who is willing to assume a fiduciary role.
But that's a subject for another article.