Promises made should be promises kept! However, when it comes to Pensions, are the promises of a guaranteed income stream into retirement from your pension going to be kept?
What is the need for the Pension Benefit Guarantee Corporation if your pension was secure? It is time for Americans to start to understand these financial instruments because their own retirement quality of life is on the line.
Unlike a defined contribution account, a pension is a defined benefit account. The difference is that a defined contribution defines the contribution but does not define the beneficial distribution.
A defined benefit account defines the benefit not the contribution. The benefit will be a lump sum or annuitized income stream during retirement.
A pension plan is lawfully paid for by your employer through your working years. There are rules in taking out the income stream which will not be covered here.
The real question is whether or not your pension is secure and solvent. If not, how would one know?
At issue would be companies restructuring their pension plan even after retirement. Ford did this several years ago in 2012. They sent the already retired salaried pension beneficiaries an option to keep their income as is or take a lump sum that was conveniently calculated based on their mortality.
The problem was that since pension income is an annuity income the lump sum could not be effectively placed in any retail annuity.
The income stream produced was greatly reduced. The lump sum was only at about 72% of the amount needed to put into an annuity that would produce the same income stream. What is a retiree to do?
The Pension Benefit Guarantee Corporation (PBGC) is an agency authorized by Congress in 1974. It basically exists to guarantee the income stream of pension plans that are insolvent or about to be.
Pension plans that use PBGC either pay insurance premiums to PBGC or they have taken over the management of the pension.
Of course, the problem here is assuming that because the PBGC exists, your pension is secure and guaranteed. This is the head in the sand approach. There are some serious questions about the solvency of the PBGC in their multi-employer pension program.
A very informative article by the Heritage Foundation on the programs put out by the PBGC. Even if your pension is guaranteed by the PBGC does that mean that you will receive the income stream that your pension says that you will?
A very strong and alarming statement in this article was as follows:
“Absent substantial reform, the PBGC will be unable to pay promised benefits to the retirees of the failed pension plans that it insures.If Congress does not alter the rules governing multi-employer pensions and the PBGC’s multi-employer program, millions of workers could lose most or all of their promised pension benefits orFederal taxpayers could be forced to finance an expensive bailout of private, union pensions.”
I urge you to start your research on your own pension or pension plan with the following strategy. Contact your pension administrator and get their annual report. Then take the time to thoroughly read and study both links that were referenced in this article.
Lastly, I urge you to do your retirement planning with a stress test at 50 percent payout of your projected pension. This means putting all of your assets into play but your pension at a lower payout than promised.
Also, do not forget to stress test your social security benefits payout as this is also an asset that needs to be considered.
Please get professional advice from a qualified financial advisor that is well trained in pensions, social security and asset allocation investments. Discuss with him your concerns about your pension plan. Go over the details as much as possible.
