Sen. Susan Collins of Maine, chair of the Special Committee on Aging, speaks during the hearing on "Pension Advances: Legitimate Loans or Shady Schemes?
Sen. Susan Collins of Maine, chair of the Special Committee on Aging, speaks during the hearing on "Pension Advances: Legitimate Loans or Shady Schemes? - 
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On Wednesday, the Senate Special Committee on Aging holds a hearing looking into pension-advance schemes.

These are deals that lending companies — mostly small, independent operations — offer to retirees in which the retiree receives a lump-sum payment up front, and then the company receives the retiree’s monthly pension payment for a period of many years until the advance is paid off, along with interest and fees.

The question is: Are these pension advances a legitimate way of helping seniors out of a cash-crunch when they need it or an abusive high-interest loan designed to take advantage of vulnerable, unsophisticated seniors?

Pension advances have been marketed mainly to military retirees. Stuart Rossman of the National Consumer Law Center, who was to testify at the hearing, called them “exploitation” because the lump-sum is much lower than the monthly pension payments that the retiree gives up. Interest can be 50 percent or higher, but it isn’t typically disclosed. And it can leave a military retiree — who may have a disability or illness — without a needed safety net. 

Olivia Mitchell at the University of Pennsylvania Wharton School’s Pension Research Council, said pension advances can have a legitimate use — for instance, for a senior in financial crisis with bad credit who needs money right away. And she pointed out that many corporations routinely offer pension buyouts to hourly and salaried workers when they retire. But, she said, “People are very financially illiterate, and they have a ‘lump-sum illusion problem’ — they think that it’s really worth a lot, and maybe they’re not getting the full value.”

Consumer advocates worry that pension-advance companies may expand from the military market to target other vulnerable pensioners, including other retired public employees. They are calling for stricter oversight and laws in the states and at the federal level, to monitor and regulate pension advances.

Correction: In the on-air version of this story, we referred to Stuart Rossman as Stuart Rossberg. We regret the error. 

Follow Mitchell Hartman at @entrepreneurguy