"Underfunded by $11 billion, the [Delta] pension fund seems destined for default, just like the pension at US Airways and United Airlines during those airlines’ recent bankruptcies."
-Jacksonville Business Journal, March 14, 2006
Workers used to regard a pension managed by their employer as a promise of a secure retirement. Today, many of those promises have been broken. Single-employer schemes are collapsing across the country, taking workers’ savings with them.
Employers are using several strategies to get out of pension obligations. Some are cutting current benefits. Others are freezing pension schemes so that workers keep what they have already earned, but don't earn any more. Some companies are declaring bankruptcy and dumping their pension obligations on the federal government.
The list of evaporating single-employer pensions is long, and includes many industries. IBM, Verizon, Motorola, Hewlett-Packard and Sears are among those that have frozen pension plans or made similar moves. General Motors is reducing its pension benefits by switching employees from a defined benefit plan, in which workers are guaranteed a certain payout on retirement, to a defined contribution scheme.
When a company declares Chapter 11 bankruptcy, it can transfer its pension obligations to the Pension Benefit Guarantee Corporation, a government-run insurance program. Unfortunately, a transfer to the PBGC doesn't mean your pension is safe.
The PBGC was set up in 1974 to insure traditional employer-paid pension plans. The idea was that companies would pay insurance premiums to the agency, and if an employer couldn't support its pension plan anymore, the PBGC would pay the promised benefit to retirees.
Now it turns out that the PBGC itself, which insures the pensions of about 44 million workers, is deep in debt. It reported a $22.8 billion deficit for 2005, as big airlines and other companies declared bankruptcy. The PBGC could soon be socked with even more liabilities: It estimates that altogether, single-employer plans have unfunded liabilities – that is, money they've promised but can't pay – of $450 billion.
The upshot is that money available to pay benefits to retirees is going to run out. Workers whose pensions are taken over by the PBGC are likely to find that payments are less than they were promised.
So what does it all mean for you? In most cases, a pension freeze won't affect current retirees. Workers who have been at a company for many years, though, particularly those in their 40s and 50s, could be in for some nasty surprises, ending up with substantially less money than expected.
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