Why Your Pension Is at Risk


PensionThe recent bankruptcy filing from American Airlines parent company AMR (AMR) could become the latest example of what can happen to workers and their pension plans when their employers go bankrupt.

With AMR's bankruptcy proceedings having just gotten under way, it's too early to tell what could happen to some AMR employees. But past bankruptcies give a roadmap for what can happen to workers anywhere when their employer goes under.

You see, even if a company eventually gets out of bankruptcy and keeps operating throughout the process, its employees may end up with the short end of the stick -- especially those workers expecting a pension check in retirement.

Who Pays Your Pension?

Over the past decade, several airlines, including United Airlines parent United Continental (UAL), Delta Air Lines (DAL), and US Airways (LCC), have gone bankrupt. All three of the companies decided that they would terminate at least some of their pension plans. By doing so, they were able to shift responsibility for making pension payments to the Pension Benefit Guaranty Corporation, leaving the government on the hook for future benefits.

If you don't make much money at your job, then you typically don't notice a big change if the PBGC takes over your employer's pension plan. Among the airlines whose pension plans the PBGC has bailed out, more than three-quarters have gotten their benefits in full.

But if you've risen through the ranks over the course of your career, then you may well get only a fraction of what you expected.

Pension Pay Cuts

For this year, the PBGC pays a maximum of about $54,000 for 65-year-old workers, with younger workers having a lower cap. That's undeniably a nice chunk of money, but for pilots and other mid- to high-level employees, it may be much less than what they'd be entitled to receive under their previous plension plans.

Sometimes, that doesn't turn out as badly as it sounds. For instance, with the US Airways pension plan, retired pilots ended up receiving more than 90% of the benefits they were originally promised.

But when you consider other possible impacts of bankruptcy -- such as reduced or eliminated retiree health-care benefits -- the impact on worker finances can be huge.

Who's on the Hook? Taxpayers

The PBGC is supposed to be funded entirely from two sources: insurance premiums that employers pay, and the assets of the pension plans that the government entity takes over. But usually, the whole reason the PBGC comes in to manage a pension plan is because it's underfunded -- sometimes severely.

For instance, within the four pension plans that AMR sponsors, the plans have a funding shortfall of more than $10 billion, with $18.5 billion in liabilities offset by just $8.3 billion in assets. It's easy to see how just a single big-employer failure can put big financial stresses on the PBGC.

Moreover, just as the weak economy has hurt businesses, it has also left the PBGC with a severe funding shortfall. Last month, the PBGC announced a record deficit in 2011 of $26 billion, the largest in its 37-year history. With an anticipated $107 billion in liabilities to pay pension recipients and only $81 billion in assets to cover them, the PBGC may join the long list of private companies and government-sponsored entities that end up needing a taxpayer bailout.

Protect Yourself

Unfortunately, there's only so much you can do to protect yourself if your employer makes bad decisions about your pension plan. With 401(k) plans and other pension alternatives increasingly becoming the only option for younger workers, the most likely outcome is that most pensions will simply become a thing of the past -- and their last recipients may well consider themselves lucky if they get the full benefits they've earned over their careers.

Motley Fool contributor Dan Caplinger plans to make his own pension. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article.

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September 25 2012 at 7:47 AM Report abuse rate up rate down Reply


September 25 2012 at 7:40 AM Report abuse rate up rate down Reply

Hmm, yeah was wondering the same thing...

September 25 2012 at 7:37 AM Report abuse rate up rate down Reply

I don't know were he gets his information on UAair pilots pension's I retired from USair as a pilot an recieve about a third of what I was owed

January 04 2012 at 8:57 AM Report abuse rate up rate down Reply
Judy Lynn

Pension plans burglarized and nothing is done about it, just as they have burglarized the Social Security Trust Fund and now they want to make it private for the same banks that bankrupt the U.S. and around the globe, foreclosed on peoples homes with Robo Signers, when will Americans get enough of being sexed by the Government.

January 02 2012 at 8:15 AM Report abuse rate up rate down Reply
1 reply to Judy Lynn's comment

Who is "They" Judy?

January 03 2012 at 3:08 PM Report abuse rate up rate down Reply

Go ask the American Union to bail them out since they are the ones who got them there.. But, then again - American management caved in to all the Union demands. Go unions go, I'm sure you and Obama can continue to cripple our country. Here's to November 2012.

December 31 2011 at 7:18 PM Report abuse rate up rate down Reply

Docfitness you are correct; however this doesn't work when the company decides to go to a cash system when you as a person depending on your pension being there is over 55. I don't believe this is fair. (I know the world isn't fair) but our pension was overfunded and it just went away when a new company bought us. There needs to be some protection from this happening. I know it probably won't change because the politicians are assured that their BIG pensions are going to be there. Afterall they voted for them. GOD BLESS AMERICA

December 31 2011 at 11:49 AM Report abuse rate up rate down Reply

Its interesting that the article focused only on private sector pensions. When a company goes bankrupt and its determined that it underfunded its pension, taxpayers take a hit. however, the actual amounts involved are DWARFED by the unfunded liablity of public sector pensions.

The scam: a pension program has to assume a certain rate of growth in pension assets, which, in turn, determines how much you have to contribute today in order to have sufficient assets to make payments when a person retires. the higher the assumed rate of return, the lower the payments today.

Almost EVERY state pension plan assumes that pension assets will grow at 8% a year. They base this off historic permance data for the past 60 years. The problem? There is no recent period where you can show an 8% return year over year. So, for example, NYC estimated that it would get an 8% return from 2000 to 2010. Its actual rate of return was closer to 2.5%. As a result, pension payments for that same 10 years was $30 billion higher than originally estimated. Yet NYC continues to estimate that it will get an 8% return next year and the year after.

The GAO just released a report on SS' unfunded liability. Its in the neighborhood of $40 TRILLION. That would normally mean that it would have to set aside about $3 trillion today. In other words, our actual deficit for this past year was closer to $4 trillion, rather than the $1.3 trillion the government actually discloses.

December 30 2011 at 1:15 PM Report abuse rate up rate down Reply
2 replies to indisposed99999's comment

Please refer to: http://prospect.org/article/pinching-pensions [Pinching Pensions by Rbt Hiltonsmith] for another view of the "crisis" in public pensions. According to the folks who study the situation (Pew Center, Center for Economic Research), the "crisis" is a political one, and not one based on facts and figures. All states combined, according to the analysis by the aforementioned groups, currently have 80% funding for FUTURE public employee pensions. This is not a crisis, at all. The underlying political ploy, manufactured by the extreme right (e.g., Scott Walker-Wisconsin, John Birch Society, certain Tea-Party factions, et al), is to weaken the strength of unions. The article is one of many, that have come to similar conclusions, based on rigorous analysis. So, let's not be too quick to assume that public and private pensions are the same--THEY ARE NOT!

December 30 2011 at 2:51 PM Report abuse rate up rate down Reply
1 reply to MONTOOTH's comment

Also, the GAO report projected that SSA deficit out to infinity--this is not a deficit that will be incurred in our lifetime. I share the concern for fiscal responsibility, but let's not print or regurgitate facts out of context.

December 30 2011 at 2:54 PM Report abuse rate up rate down
Sam Das

All of you are talking with faulty informations...none of you know the actual numbers therefore all of you are rejected...since you cannot know what is really happening the least you can do is shut up...what you are fed is all wrong. I cannot tell you the truth because I don't know the truth atleast I know I don't know..

January 01 2012 at 1:03 AM Report abuse rate up rate down Reply

how about us private sector slobs who got downsized(unemployed) who have to pay increased property taxes,tolls,ect. so the public sector workers can get there full pensions for life after 25-30 years on the job. i personaly know of some who retired at 52 with full pensions and health care for life. myself i will be working until im 80 or dead.

December 29 2011 at 12:02 AM Report abuse rate up rate down Reply

How is this not stealing? Anyone care to enlighten me?

December 28 2011 at 10:29 PM Report abuse +1 rate up rate down Reply