I work for the state of Texas and about once a year I get a statement from our Employment Retirement System. Each month I contribute 6.45% from my paycheck towards a pension and the state agency matches this contribution. Among other things, the most exciting part of the statement is the chart where it details how much I can look forward to in retirement via pension benefits (once I am vested, in 23 months from now).

Something else it includes that I haven’t paid much attention to until now is an illustration of a sturdy three-legged stool. This stool represents what the state of Texas sees as the three legs of any healthy retirement plan: Social Security benefits, a 401(K), and our pension. Recently, I have begun to wonder about the sturdiness of this three-legged stool.

I have heard of many bankruptcies by both companies as well as governments over the last two years. Also, the last time I checked my statement I noticed an asterisk beside the health plan benefits. The asterisk stated that the health plan was not a guarantee and that basically the state has discrepancy to do away with health insurance benefits in retirement should it see fit. This had me thinking, for those of us who are fortunate enough to be offered pension plans (only 31% of employees were offered a pension plan in 2010), how safe is our pension should our company or agency declare bankruptcy between now and when we are ready to retire?

Your Private Sector Pension has Insurance

Pension plans may run out of money, the company may liquidate and there is no new company to take the plan over, or perhaps the current company can continue to operate but not while maintaining its pension plan. All of these scenarios spell trouble for workers who are counting on their pension benefit. Fortunately, there is insurance for your pension. The Pension Benefit Guaranty Corporation (PBGC) was formed in 1974 to insure private sector pension plans from the scenarios listed above.

This insurance is not funded by taxpayer money. Instead, companies must pay insurance premiums set by Congress. Other funds are received from investment income, assets from pension plans taken over by PBGC, and recoveries from the companies formerly responsible for the plans. To give you an idea of how much is collected, in FY 2011, $2.4 billion was collected from single-employer and multiemployer programs, and as of September 30, 2011, the PBGC had an investment portfolio worth almost $70 billion.

PBGC Limits Types of Benefits and Amounts

The PBGC has its limits including the type of payout and the amount of payout. For example, the PBGC does not guarantee health or welfare benefits, life insurance, vacation pay, severance pay, or benefits payable because of disability that occurs after the guarantees take effect.

Maximum Pension Benefit. Also, the maximum benefit payout for a life annuity with no survivor benefits for 2011 is:

  • $54,000 yearly ($4,500 monthly) at age 65
  • $42,660 yearly ($3,555 monthly) at age 62
  • $24,300 yearly ($2,025 monthly) at age 55

Notable Bankruptcies and Pension Failures

Since its inception, the insurance plan has funded pensions for 1.3 million workers and retirees in 4,140 terminated single-employer plans. Generally air transportation and the metals industry account for 50% or more of all pension failures. However, with the decline in the auto industry and multiple automaker bankruptcies during the recession, automotive parts manufacturer Delphi Corp. became the second largest pension failure in the PBGC’s history in July 2009 with 69,402 vested employees.  The liability assumed by the PBGC was a staggering $6.1 billion. Other notable bankruptcies that resulted in failed pension plans includes United Airlines with pension liabilities of $7.4 billion (2005), Bethlehem Steel with pension liabilities of $3.7 billion (2003), and US Airways with pension liabilities of $2.8 billion (2003).  In recent news, PBGC is currently protecting the pension plans of 63,000 former Kodak employees as Kodak files for Chapter 11 bankruptcy.

Currently (as of the end of 2008), the PBGC is underfunded by a staggering $10.7 billion, a figure that continues to grow. This is due to the high number of company bankruptcies over the last three years.

So what does this mean for me and my public-sector pension plan? It turns out that if the state of Texas declares bankruptcy at some point between now and 30 years when I will be hoping to retire, my pension will not be insured by the PBGC (only private sector pension plans are insured). However, most public sector pension plans are protected by state laws and constitutional amendments. As for Texas, it looks like I will be fine.

Do you have a pension? Is it a private sector or a public sector plan? 

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Comments to What Happens to Your Pension When the Company Goes Bankrupt?

  1. There are Federal laws that afford some general protections for participants in pensions that are not available for retiree health care benefits. The new and safest way to plan for retirement is to assume that while you may work for a company that offers retiree health benefits, it is unlikely to be available during your own retirement. With health care costs increasing by over 10% annually and people living longer, I don’t see how companies can keep this benefit up. I know someone (with MS) who uses his HSA as a retirement savings account fully. He doesn’t touch his contributions in anticipation of needing that money in retirement despite being eligible for the company’s retiree health plan. I think he is wise to not depend on the benefit that can be canceled at any point with no recourse.

    The 3-legged stool is still a great visual. You might change the leg for social security benefits to cover any potential government benefits, including Medicare. You still should not assume those benefits will be there when you retire. The main point of the 3-legged stool is that your retirement will need to be funded by multiple sources.

    Christianne

    • Hi Christianne,

      That is interesting that your friend uses their HSA as a retirement account. I think I will look into the details of that.

      I think you are right–it is not feasible for many companies to continue paying healthcare benefits of retirees. Scary proposition for some (me included since it is so far away)!

      Amanda

      • By the way, great article in Saturday’s WSJ about Kodak and how the gov’t is trying to help retirees who lose their benefits due to a bankruptcy. It’s only for people currently retired so it highlights how we need to think about healthcare in retirement.

        Christianne


  2. Thanks for the heads up Christianne!

    Amanda L Grossman

  3. No pension plan for me just yet, and hopefully Texas will not be going bankrupt anytime soon!

    Tyler S.

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