By Dan Caplinger, The Motley Fool
The PBGC steps in to make payments to pensioners when pension plans fail. Source: PBGC.
Filed under: Investing
Underfunded pension plans represent one of the biggest potential financial problems facing the nation. Despite rising challenges over the past several years in meeting pension obligations, most pension plans have remained committed to making good on the promises they had already made to retired pensioners, following the federal law that protect retirees against benefit reductions.
Now, though, retiree pension benefits could be at risk for the first time in decades. As a recent Wall Street Journal report explained, unions and employers have gotten together to recommend changes to the nearly 40-year-old laws governing pension plans that cover workers from multiple employers. Those changes would make it possible for plans to reduce existing benefits paid to current retirees.
Us vs. them
The dilemma that pension plans face right now is a difficult one. Although many pension plans have been diligent in maintaining adequate funding levels to finance the promises they’ve made, an increasing number of plans are falling behind. With scores of pension plans on a path toward failing entirely, cutting pension benefits now could allow the plans to survive longer, benefiting current workers and relatively new retirees at the expense of older retirees.
Yet the policy behind protecting retirees is still as strong as ever. After you retire, you have almost no ability to replace lost income from declining pension payments from other sources. Conversely, current workers can still take steps to boost their personal savings to plan for an anticipated reduction in future pension benefits.
Indeed, most private companies have followed the strategy of protecting current pensioners while removing benefits from future workers. Over the past several years, IBM , Verizon , and countless other major employers have frozen existing pension plans, keeping them in place for employees that already earned benefits from them. New hires, however, were shunted into 401(k) plans and similar defined-contribution plans, which carry far less risk for the employer.
In addition, failing private companies have often relied on the federal Pension Benefits Guaranty Corporation to step in and protect their workers. In the past, US Airways and United Airlines, now merged into United Continental , have seen the PBGC take over certain pension-plan obligations to provide benefits to their workers as part of the airlines’ respective bankruptcy proceedings. Under the PBGC, certain former workers whose benefits fall above a maximum benefit level have seen their payments cut, but many have gotten full restoration of their pensions.
The PBGC steps in to make payments to pensioners when pension plans fail. Source: PBGC.
Unfortunately, the PBGC has had financial problems of its own for years. The premiums the PBGC collects from employers haven’t been sufficient to avoid a funding deficit of about $34 billion, and it anticipates rising rates of pension insolvencies to push that deficit much higher in the coming decade. As a result, lawmakers will be more receptive to union and employer proposals that could reduce any potential
Source: FULL ARTICLE at DailyFinance
