Sunday, January 4, 2015

Can You Lose Your Pension?

Can you lose a defined-benefit pension?  Even if you are a government employee?   The answer is a qualified "MAYBE" - at least part of it.

In a previous posting, I mentioned that for some folks, it is possible to lose a large part of their pension plan.   You plan for retirement, after being promised X dollars, only to find out that X has now turned into Y.

How does this happen and how do companies get away with this?

Well, the old-fashioned way was Bankruptcy.   A pension plan is a contract, plain and simple, and nothing more than a promise to pay those X dollars, when you retire.  And when the company making this contract goes bust, as a pensioner, you are merely an unsecured creditor to the company, like anyone else.  And if the company is bankrupt, it may be relieved, totally or in part, of any or all pension liabilities.

And of course, you can play games with Bankruptcy.   For example, if you are a large coal company, you can "spin off" a division that has a huge pension liability and then let it fail, thus dumping your pension liability onto the government.

Do you lose your entire pension?   Not necessarily.  Most pensions are backed by the Pension Benefit Guarantee Corporation, which was part of ERISA and is funded by pension insurance payments, as well as the tattered assets of bankrupt pension plans and claims against bankrupt corporations.  

However, there is a maximum benefit that can be paid out ($56,000 as of 2011) so if you have a huge pension (in the six figures) and your company goes bust, well, the amount you get from PBGC may be a lot less than you are used to.   If you have a huge debt load to service, well, it could get ugly.

Now, for a government employee, the prospect of your employer going bankrupt may seem pretty slim.  And so far, this seems to be the case, although some folks claim that States like California, which have huge unfunded pension liabilities, may melt down in coming years.

Detroit is the most famous city as of late to go bankrupt.  But even there, Pensioners lost only 4.5% of their pension - and voted in favor of the cut.

So, at least for now, public employees seem pretty safe, in terms of pensions.   The larger the government you work for, the safer you pension will likely be.   But it is possible, that down the road, that some folks may see draconian pension cuts - even if they are public employees.  And indeed, there have already been a few isolated cases, such as in Prichard, Alabama, where employees faced severe cuts.  The town refused to raise taxes, and simply ran out of money in 2009 and just stopped sending out pension checks.

And public employee pensions are not covered by the Pension Benefit Guarantee Corporation, either.

Cuts to pension plans overall seem to be part of the landscape.   Congress just passed a bill allowing for cuts to multi-employer pension plans, but it went mostly unnoticed.

The problem, of course, is that on average, pension plans in the US are underfunded - only about 75% of the amount needed has been set aside.   And since so many people are upset about taxes, finding that remaining 25% will be difficult.

So I think it is safe to say we will see more private pension plans in jeopardy in the next decade, and more than one public pension plan at least partially cut, as a town or city goes bankrupt.  It will happen.

There are of course, other ways, you can lose your pension or get a lot less than you thought you would.

As this article notes, any pension plan is only as good as the wording in the contract.  And some companies have found legal loopholes in contracts to cut or eliminate pension benefits.   Some pension contracts literally had clauses allowing the company to change benefits at a whim - or eliminate survivor's benefits (which seems particularly cruel).

Early-outs are another way companies can short-circuit pension plans.   A company offers you early retirement, which sounds like fun, and dangles a huge six-figure (or low-seven-figure) check in front of your face.   The problem with this scenario is four-fold.   First, the amount they offer you may seem like a lot of money, but may not be enough to generate the equivalent retirement income you may need to last the rest of your life.   Second, you are no longer a pensioner, but a 401(k)-type retiree like the rest of us.  Third, you may have a huge tax liability unless you roll over the money into an IRA.   Fourth, if you spend the money on ill-conceived schemes and business ventures, you may run out in no time.   And I have seen Number Four happen, believe me!

There are other ways to lose your pension, at least in part, due to your own malfeasance.  There are "pension loan advance" places galore out there - who usually target military retirees - offering a "lump sum" in exchange for X years of future pension benefits.  These are toxic deals - with staggeringly high interest rates.  And they target the military because folks in the military are used to cradle-to-grave coverage and thus do not manage money well (they are also targeted, when enlisted, for title pawn loans, payday loans, and other odious bad deals).

What is really sad, is that some of these oldsters take these pension advance loans without figuring out first, how they are to survive with no income whatsoever.

So, is it possible to lose your entire pension?   Well, if you make some really dumb mistakes, yes

It is possible that your pension may be reduced?  I would say highly likely, if you work for a private corporation these days.   Pension benefits have historically been under-funded and many companies are cutting benefits as a matter of course.   And of course, in bankruptcy, you could end up losing a large part of your pension, as the Pension Benefit Guaranty Corporation will only pay a maximum amount that may be far less than what you are receiving.

What about Public Employees?  These seem like the safest bet - and the larger the entity you work for, the better off you are.  Small towns and counties and cities are probably less safe.  The Federal Government is probably the safest.   But then again, it remains to be seen what will happen in California in the next 10-20 years, when an awful lot of baby boomers start retiring and demanding all that money that was promised, but never set aside.

The real problem is, of course, that we are living far longer today than in the past - and often retiring a lot earlier.   And wild promises have been made by pension plans, and those same plans were not fully funded.   Some unions, such as the Eastern Airlines Pilots Union, tried to address this by taking pay cuts in return for promises to fully fund the pension plan.   Problem was, in bankruptcy court,  their liabilities were lumped in with those of other, lesser funded plans of other unions.  The net result is, they ended up no better off, and perhaps worse, than other union employees for that airline.

Of course, you can't go through life planning for "worst case scenarios".   But it never hurts, I guess, to think about a "Plan B" and "what ifs".  The next decade will be a tough time for a lot of pension plans, I believe.

1 comment:

  1. Maybe we should start encouraging people to take up smoking....

    ReplyDelete

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