What Happens When Your Pension Fails
If your company goes out of business or enters bankruptcy next year, you won't necessarily lose your pension. Most private sector pensions are insured by the Pension Benefit Guaranty Corporation, a government agency that pays out benefits if plans fail. The maximum guaranteed benefit for a 65-year-old retiree will be $59,318.16 in 2014, up from about $57,500 this year.
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Most retirees receive pensions worth less than $59,000 per year, which means the entire pension is insured. The PBGC says 85 percent of pensioners receive the full amount of their promised benefit.
The maximum guaranteed benefit is lower for those who retire before age 65. For example, pension benefits are only insured up to $26,693 for a retiree who begins payment at age 55 and $38,557 at age 60. But the insurance limits also grow for people who begin claiming their benefit after age 65 to $98,468 at age 70 and $180,327 at 75. "The maximum amount is higher for benefits starting at ages above 65, because older retirees receive fewer monthly pension checks over their expected lifetimes," according to a statement from the PBGC.
The maximum pension guarantee is also lower for workers who elect for their spouse to receive survivor's benefits. Pensions are insured up to $53,386 in 2014 for 65-year-olds who have requested their spouses get payments after they pass away. That insurance amount drops to $34,701 for 60-year-olds retirees, but climbs to $88,621 for 70-year-olds.
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If a pension plan ends or enters bankruptcy in 2014, but a retiree delays collecting payments, the 2014 rates still apply. The PBGC may not fully guarantee benefits if the plan was created or benefits were increased within five years of the plan's termination. Health benefits, life insurance, severance and vacation pay are also not guaranteed by the PBGC.
However, the PBGC has funding problems of its own. Its deficit increased to about $36 billion in fiscal year 2013, up from $34.4 billion in 2012. The PBGC assumed responsibility for approximately 57,000 new pensioners in 111 underfunded single-employer plans that were terminated in fiscal year 2013.
The agency is funded by insurance premiums paid by the sponsors of pensions plans, investment income and assets from the former pension plans it takes over. It does not receive funds from general tax revenue. Josh Gotbaum, director of the PBGC, says the premiums are too low to fund the agency's obligations. "Without changes PBGC itself will not have the funds to pay benefits," he says.
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The PBGC projects that it has enough assets to pay out promised benefits for 10 to 15 years. "We view our job as to make sure people are not worried about receiving their benefit in retirement," Gotbaum says. "When a pension plan fails, that means the company backing it up has failed, and the last thing that PBGC wants is for you to have doubts about those plans too."
