Why a Pension Might Not Be Your Best Option for Retirement
- What is PBGC?
- How Much Does it Cover?
- PBGC Problems
- Final Thoughts
Having a pension was once the right of many working adults in the country. Now it can be a liability because changes in policy can remove it right when you start to depend on it being there for you when you retire. That is where the Pension Benefit Guaranty Corporation (PBGC) comes in. The Pension Guaranty Corporation came into being in 1974 as part of the Employee Retirement Income Securities Act (ERISA). It was designed to protect the pension plans of the employees that were employed through most of the duration of their company’s pension plan, but as people continued to retire, they gradually became insolvent because of the high numbers and as of 2019, the PBGC covers over 26,000 surviving adults with pension plans. There is also insurance protection for the other 40 million American works that have pensions.
What is PBGC?
The Pension Benefit Guaranty Corporation is there for when a company and its pension plan goes bankrupt. The PBGC steps in to protect the payment being made to pension plans and makes sure that the retirees won’t lose what can be their only source of retirement income. It is almost the same thing as a bank having guarantees on their accounts so that people with savings won’t lose them if the bank fails.
Employers attached to this pan make mandatory payments that go to an insurance fund that has been set up for emergencies like this. They also control what is left in anyone’s plan that they take over. If a company has a retirement plan that is on the rocks but not underwater yet, the PBGC can step in and manage the remaining capital and investment assets as well as its liabilities. The PBGC is not funded with taxpayer money.
How Much Does it Cover?
If you work in the private sector and have a pension, there is a very good chance the plan is covered by the PBGC. The following people are not covered:
- Money Purchase Plans
- Thrift Savings Plans
- Employee Stock Ownership Plans (ESOPs)
- Profit-sharing plans
- Small professional practice pensions (companies with fewer than 25 employees)
- Religious Institution Pensions
- Private Retirement Accounts (IRAs & 401(k)s)
- Government/Military pensions
This is not designed to be an unlimited plan so it only allows replacement for a select amount at its maximum. The maximum amount in 2019 was $5,607.95 per month, upwards of $67,295.40 per year. Making more than that a year will mean the person will face the loss of some of their benefits.
People covered by the PBGC have rarely had the benefits reduced at retirement because there are restrictions put into place to keep premiums low and prevent employers from giving their employees high pensions covered by the government.
If a retirement plan is close to defaulting and it can’t pay out its pension benefits then the company can file a distress termination. Doing so requires proof from the plan provider that they are no longer able to pay on the plan and anyone attached to it.
The PBGC has the right to accept or deny each plan it receives for a distress termination. If they allow it then the plan will be under the control of the PBGC which will keep the retirement plans of current and future retirees safe so they can get what they have worked hard for. A combination of PBGC assets and plan assets will be used to play the participants.
A standard termination can happen when a company willing hands over its retirement plan to the PBGC which is usually done if the company is insolvent and has made bad investments.
The company must show that it can meet its obligations financially to complete the standard termination. This can include purchasing lifetime annuities for its qualifying retirees or demonstrating some other way to meet their obligations to their retiree’s retirement accounts.
Because of the financial problems that came up in the recession, it was predicted that the PBGC would become insolvent with the number of American auto companies declaring bankruptcy. The auto industry has historically had large pensions and strong unions to back that prosperity. General Motor is famous for having spent more money on retirement benefits than on steel because of this.
This potential problem would have given the PBGC a deficit of $100 billion as they attempted to cover all the people needing their pensions protected.
The Federal Government bailed out all of the American Auto industries except Ford so the default was averted. This has not stopped other potential PBGC problems from occurring such as the number of pensions still available has been greatly reduced. This means that the PBGC is steadily losing money as the nature of business changes for modern times which include few pensions or retirement plans. This has not stopped people from retiring and needing pension assistance or the problems the 2008 financial crisis brought to American corporations.
PBGC has its own financial problems but is still active enough to protect the plans covered by them. They will be stable enough for the foreseeable future. This does not stop you from taking matters into your own hands and starting your own savings accounts such as an IRA or annuity to see you through in the hard times. Pensions are not guaranteed and there will always be a need for adjustments as you age and it’s better to have a nest egg ready for you should something unexpected happen.
- Planning your retirement is difficult. You need to consider where you are now and where you will be when you do retire. Do you know what age you will be at? You also need to figure out your healthcare and consider any other expenses you anticipate such as helping pay for college.
- You may want to consult a financial advisor if you truly do need help, they can help put your finances in order and help you take positive financial steps forwards.