How Much You Get if Your Pension Fails

American Airlines workers could lose over $1 billion in retirement benefits if their pension plans are terminated.

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The maximum private sector traditional pension amount insured by the federal government will increase to $55,840.92 in 2012 for 65-year-old retirees, up from $54,000 in 2011. This is the first increase in pension insurance provided by the Pension Benefit Guaranty Corporation since 2009.

[See The 10 Biggest Failed Pension Plans.]

The PBGC is a government agency that pays out benefits promised to private sector workers if their pension plans fail, up to annual limits. Workers who are promised benefits that exceed these limits will see their payments reduced if the pension plan terminates and is taken over by the PBGC.

For example, if American Airlines were to end their four traditional pension plans that cover almost 130,000 employees, the PBGC would be responsible for paying about $17 billion of the approximately $18.5 billion in benefits promised to employees, according to PBGC calculations. “Based on our estimates American Airlines employees could lose a billion dollars in pension benefits if American terminates their plans,” says PBGC Director Josh Gotbaum. “This is true even if PBGC becomes responsible for those plans, because Congress has limited the size of the pensions we can pay. Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut, in some cases dramatically.”

[See How to Find a Lost Pension Plan.]

The maximum payable pensions are higher for people who claim benefits after age 65 and decrease for those who retire early or elect to receive survivor’s benefits. For example, people who retire at age 45 would only have their pension insured up to $13,960.20 each year, while those who delay retirement until age 75 could get as much as $169,756.44 annually from the PBGC if their pension plan fails. And a worker who retires at age 65 and elects survivor’s benefits can get a maximum possible payout of $50,256.48 in 2012, compared to $55,840.92 if no survivor’s benefits are provided. All pension plans that end in 2012 will be subject to these limits, even if a retiree does not begin collecting benefits until a future year.

These caps on pension payouts apply only to traditional pension plans. Retiree health insurance and 401(k)s are not insured by the PBGC. The guarantee applies only to benefits earned before the plan terminates or the date the employer files for bankruptcy. Benefit increases provided by employers less than five years before the retirement plan’s termination date may not be fully insured.

[See 7 Reasons You Don't Have a Pension.]

The PBGC paid nearly $5.5 billion in benefits to 873,000 beneficiaries in over 4,300 failed pension plans in fiscal year 2011. Another 628,000 people are scheduled to receive benefits from the PBGC in the future. The agency, which does not receive taxpayer funds, had a $26 billion deficit at the end of fiscal year 2011, up from $23 billion in 2010 and the largest deficit in its 37-year history.

Twitter: @aiming2retire