What The Pension Insurance Deficit Means for Your Retirement

Don’t panic: payments will continue in the short-term

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The government agency that insures private sector pensions and pays out benefits if they fail posted a $33.5 billion deficit for the first half of 2009. That amount is the largest in the Pension Benefit Guaranty Corporation’s 35-year history and triple fiscal year 2008’s $11 billion shortfall. But that doesn’t mean you won’t get your promised benefits, at least in the short term. The Senate held a hearing today to evaluate the PBGC’s ability to insure pensions in the future. Here’s how your retirement plans could be affected.

Payouts will continue. PBGC attributes the deficit increase to about $11 billion in completed and probable pension plan terminations, approximately $7 billion resulting from a decrease in interest rates used to value liabilities, $3 billion in investment losses, and $2 billion in actuarial charges. “The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses,” says acting director Vince Snowbarger. “The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums.” As of April 30, the PBGC’s investment portfolio was invested 30 percent in equities, 68 percent in bonds, and less than 2 percent in other investments such as private equity and real estate. The alternative investments have been inherited from failed pension plans. “The pension payments are spread out over decades, meaning it would be well more than a decade before the PBGC ran out of cash, even in the worst case,” says Douglas Elliott, a Brookings Institution fellow.

 [See Over 1000 Companies Have Recently Eliminated Employee Pensions.] 

Pension caps. Pensions are insured by the PBGC up $54,000 in 2009 for those who retire at age 65 and elect payments as a single life annuity, up from $51,750 in 2008. “For most defined benefit plan participants that limit represents a dream, not a problem,” says Dallas Salisbury, president of the Employee Benefit Research Institute. Only 16 percent of participants in plans taken over between 1990 and 2005 suffered any reduction, according to a PBGC study, and those that did lost an average of 28 percent of their promised benefits. The limit is reduced for those who retire early or elect survivors benefits. A worker who claims at age 45 can receive a maximum benefit of $13,500 in 2009. Employees who delay retirement get higher benefit amounts maxing out at $164,160 for someone who works until age 75. The limits apply to the year the pension plan was terminated or the company entered bankruptcy, even if the participant does not begin collecting benefits until a future year. Benefits may not be fully guaranteed if the pension was amended within five years of the termination date.

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Auto industry fallout. Auto industry pensions are underfunded by about $77 billion, according to PBGC estimates. About $42 billion of that amount would be guaranteed if the auto plans are terminated. The pension insurer is also concerned about weak companies in other sectors of the economy including retail, financial services, and health care. But these workers would still get their pension payouts in the short term. “Were both Chrysler and GM plans to move to the PBGC, which may not happen, total assets of the agency would move towards $200 billion,” says Salisbury. “Liabilities would grow large as well, but cash flow on those plans would be easily covered for many years.” Over the long-term the deficit must be addressed. PBGC is not currently taxpayer-financed. Funds come from insurance premiums paid by companies with pensions, assets from pension plans taken over, and investments. Worker plans are insured even if their employer fails to pay the required premiums.

[See The 10 Largest Terminated Pension Plans.]