If your company pension plan fails, you won't necessarily end up without any retirement income. Most traditional pension plans, but not 401(k)s, are insured by the Pension Benefit Guaranty Corporation up to certain annual limits. The maximum annual guarantee for a 65-year-old retiree whose pension plan ends in 2013 will be $57,477.24, up from $55,840.92 in 2012.
The PBGC assumes responsibility for a traditional pension plan when the plan runs out of money, the company liquidates, or the firm goes out of business. For example, this year the PBGC assumed responsibility for the retirement benefits for nearly 1,300 current and former employees of SP Newsprint Co., a newsprint producer in Greenwich, Conn. The company had only $74.4 million in assets to cover $150.7 million in benefits, and the PBGC now expects to pay for $73 million of the shortfall. "The guts of this agency is trying to maintain retirement security," says PBGC Director Josh Gotbaum. "The way that we do it is by taking people's worries away, and that's what we are trying to do here. "
The PBGC assumed responsibility for the retirement benefits of 47,000 people in newly failed pension plans in 2012. The government agency paid nearly $5.5 billion in benefits to 887,000 retirees whose plans failed, and will pay benefits to 614,000 future retirees when they become eligible. Additionally, the retirement benefits of over 44 million workers in more than 27,000 pension plans are currently insured by the PBGC.
The maximum insured amounts are higher for people who begin claiming benefits after age 65. For example, pensions are insured up to $95,412.24 per year at age 70 and $174,730.80 annually at age 75. But the annual insurance benefit is reduced for people who retire early, to $25,864.80 at age 55 and just $14,369.28 at age 45. Payouts are also smaller for workers who choose survivor benefits for their spouse. All pension plans that end in 2013 will be subject to these limits, even if a retiree doesn't collect benefits until a later date. For pension plans that end due to bankruptcy, the date of the bankruptcy is used to determine the maximum insurance rates, not the date the plan ended.
This pension insurance applies only to traditional pension plans. The PBGC does not guarantee retiree health benefits, life insurance, vacation pay, or severance pay. Only benefits earned before the date the plan terminates or the employer files for bankruptcy are insured, and benefit increases less than five years before the pension's end date may not be fully covered. Workers who are promised pensions greater than the annual guarantee limits could see their payments reduced if their plan fails and is taken over by the PBGC.
The PBGC, which does not receive money from taxpayers, is funded by insurance premiums paid by plan sponsors, assets from failed plans, investment earnings on those assets, and recoveries in bankruptcy. But that income doesn't provide enough revenue to pay out all of the promised benefits indefinitely. The PBGC currently has a deficit of $34 billion. "Now for a decade PBGC has recorded a deficit," says Gotbaum. "This year the deficit is the largest in the PBGC's history."